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Renegotiation, Learning and Relational Contracting

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Author Info
Gil, Ricard

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Abstract

This paper empirically examines contract renegotiation and learning in the movie industry under long-term business relationships. The paper develops a theory of renegotiation and learning with incomplete contracts. This theory shows how renegotiation as an ex-post mechanism to adjust participation constraints, together with learning, allows agents to maximize the value of the contractual relationship in the presence of incomplete contracts and long term relationships. The theory defines clear testable implications that I test in the paper. For this purpose, I use a new dataset of revenuesharing contracts and renegotiation outcomes in the Spanish movie industry. I find that movies that perform overall below expectations are renegotiated 20% more often. I find as well that movies are 6 to 8% more likely to be renegotiated in theaters where movie revenues are below the movie average revenues. Following this, I find evidence that economic agents learn across periods about the real movie audience appeal and use the new information to adjust their beliefs and make daily decisions. Finally, I conclude that contractual incompleteness is optimal in this case as long as learning allows firms to cut movie runs optimally.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13505/1/wp2005-14a.pdf
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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2005-14.

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Length: 25, [14] p.
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:hit:hitcei:2005-14

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  1. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 57-82, January. [Downloadable!] (restricted)
  2. Paul Oyer & Scott Schaefer, 2004. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," NBER Working Papers 10222, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Victor P. Goldberg, 1977. "Competitive Bidding and the Production of Precontract Information," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 250-261, Spring. [Downloadable!] (restricted)
  4. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law & Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  5. Paul L. Joskow, 1987. "Price Adjustment in Long Term Contracts: The Case of Coal," Working papers 444, Massachusetts Institute of Technology (MIT), Department of Economics.
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  6. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November. [Downloadable!] (restricted)
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  7. Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?," Journal of Finance, American Finance Association, vol. 59(4), pages 1619-1650, 08. [Downloadable!] (restricted)
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  8. Julie Holland Mortimer, 2002. "The Effects of Revenue-Sharing Contracts on Welfare in Vertically-Separated Markets: Evidence from the Video Rental Industry," Harvard Institute of Economic Research Working Papers 1964, Harvard - Institute of Economic Research. [Downloadable!]
  9. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November. [Downloadable!] (restricted)
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  10. Tom K. Lee & I.P.L. Png, 1990. "The Role of Installment Payments in Contracts for Services," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 83-99, Spring. [Downloadable!] (restricted)
  11. Darren Filson & David Switzer & Portia Besocke, 2005. "At the Movies: The Economics of Exhibition Contracts," Economic Inquiry, Oxford University Press, vol. 43(2), pages 354-369, April. [Downloadable!] (restricted)
  12. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-82, March. [Downloadable!] (restricted)
  13. Beaudry, Paul & Poitevin, Michel, 1993. "Signalling and Renegotiation in Contractual Relationships," Econometrica, Econometric Society, vol. 61(4), pages 745-82, July. [Downloadable!] (restricted)
  14. Joskow, Paul L, 1987. "Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets," American Economic Review, American Economic Association, vol. 77(1), pages 168-85, March. [Downloadable!] (restricted)
  15. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July. [Downloadable!] (restricted)
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  16. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September. [Downloadable!] (restricted)
  17. Thomas N. Hubbard, 1997. "Consumer Beliefs and Buyer and Seller Behavior in the Vehicle Inspection Market," NBER Working Papers 6245, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. James D. Dana & Kathryn Spier, 2000. "Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms," Econometric Society World Congress 2000 Contributed Papers 1511, Econometric Society. [Downloadable!]
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