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Observable and Renegotiable Contracts as Commitments to Cooperate

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  • Guido Merzoni

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Abstract

We study an example of strategic delegation in Cournot duopoly and show that if contracts are both observable and renegotiable before becoming common knowledge at the outset of the delegated game, the strategic value of contracts is preserved, but the set of equilibria is greatly enlarged. Managerial contracts can be used by owners to co-ordinate on any product market equilibrium allowing them to get a level of profit at least as large as the profit obtainable in the strategic delegation equilibrium without renegotiation, which is used as a threat point. The equilibrium set includes joint profit maximisation.

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Paper provided by Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS) in its series DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo with number dis0801.

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Date of creation: 2008
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Handle: RePEc:dis:wpaper:dis0801

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Related research

Keywords: Delegation; Observability; Renegotiation; Collusion;

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  1. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Michael L. Katz, 2006. "Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 685-706, 09.
  3. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
  4. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Levent Kockese & Efe A. Ok, 2002. "Strategic delegation by unobservable incentive contracts," Discussion Papers 0102-26, Columbia University, Department of Economics.
  7. Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991. "Competing vertical structures : precommitment and renegotiation," CEPREMAP Working Papers (Couverture Orange) 9125, CEPREMAP.
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