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Renegotiation and Optimality in Agency Contracts

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  • Ching-to Albert Ma

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Abstract

The author analyzes renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that the action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient. Copyright 1994 by The Review of Economic Studies Limited.

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Bibliographic Info

Paper provided by Boston University - Industry Studies Programme in its series Papers with number 0004.

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Date of creation: Dec 1990
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Handle: RePEc:fth:bostin:0004

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Postal: Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.
Phone: 617-353-4389
Fax: 617-353-444
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Web page: http://www.bu.edu/econ/isp/
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