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Optimality and Renegotiation in Dynamic Contracting

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Author Info
Battaglini, Marco

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Abstract

We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation-proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non-linearity of the problem, the optimal equilibrium allocation is unique.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5014.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5014

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Related research
Keywords: contract theory; dynamic contracts; regulation; renegotiation;

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Find related papers by JEL classification:
D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hart, Oliver D & Tirole, Jean, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 55(4), pages 509-40, October. [Downloadable!] (restricted)
    Other versions:
  2. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer. [Downloadable!] (restricted)
  3. Kennan, John, 2001. "Repeated Bargaining with Persistent Private Information," Review of Economic Studies, Blackwell Publishing, vol. 68(4), pages 719-55, October.
  4. Andreas Blume, 1998. "Contract Renegotiation with Time-Varying Valuations," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 7(3), pages 397-433, 09. [Downloadable!] (restricted)
  5. Courty, Pascal & Li, Hao, 2000. "Sequential Screening," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 697-717, October.
    Other versions:
  6. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June. [Downloadable!]
    Other versions:
  7. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302. [Downloadable!] (restricted)
  8. I. Hendel & A. Lizzeri & M. Siniscalchi, 2002. "Efficient Sorting in a Dynamic Adverse-Selection Model," Princeton Economic Theory Working Papers 9879581e6de5e61fcfb0cd82b, David K. Levine. [Downloadable!]
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  9. Dewatripont, Mathias, 1989. "Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 589-619, August. [Downloadable!] (restricted)
  10. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June. [Downloadable!] (restricted)
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  11. Igal Hendel & Alessandro Lizzeri, 2002. "The Role of Leasing under Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 113-143, February. [Downloadable!] (restricted)
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  12. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September. [Downloadable!] (restricted)
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  13. Rustichini, Aldo & Wolinsky, Asher, 1995. "Learning about variable demand in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1283-1292. [Downloadable!] (restricted)
  14. Biehl, Andrew R, 2001. "Durable-Goods Monopoly with Stochastic Values," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 565-77, Autumn.
  15. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  16. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Adverse Selection and Renegotiation in Procurement," Review of Economic Studies, Blackwell Publishing, vol. 57(4), pages 597-625, October. [Downloadable!] (restricted)
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  17. Holmstrom, Bengt & Myerson, Roger B, 1983. "Efficient and Durable Decision Rules with Incomplete Information," Econometrica, Econometric Society, vol. 51(6), pages 1799-819, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Battaglini & Stephen Coate, 2003. "Pareto Efficient Income Taxation with Stochastic Abilities," NBER Working Papers 10119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June. [Downloadable!]
    Other versions:
  3. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics. [Downloadable!]
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