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Delegation with Incomplete and Renegotiable Contracts

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  • Levent Koçkesen

    ()
    (Koç University)

  • Emanuele Gerratana

Abstract

It is well known that delegating the play of a game to an agent via incentive contractsmay serveas a commitment device and hence provide a strategic advantage. Previous literature has shown that any Nash equilibrium outcome of an extensive-form principals-only game can be supported as a sequential equilibrium outcome of the induced delegation game when contracts are unobservable and non-renegotiable. In this paper we characterize equilibriumoutcomes of delegation games with unobservable and incomplete contractswith andwithout renegotiation opportunities under the assumption that the principal cannot observe every history in the game when played by her agent. We show that incompleteness of the contracts restricts the set of outcomes to a subset of Nash equilibrium outcomes and renegotiation imposes further constraints. Yet, there is a large class of games in which non-subgame perfect equilibrium outcomes of the principals-only game can be supported even with renegotiable contracts, and hence delegation still has a bite.

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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 0803..

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Length: 35 pages.
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:koc:wpaper:0803.

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Keywords: Strategic Delegation; Incomplete Contracts; Renegotiation.;

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  1. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  2. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-59, August.
  3. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  4. Paul Beaudry & Michel Poitevin, 1995. "Contract Renegotiation: A Simple Framework and Implications for Organization Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 302-35, May.
  5. Bensaid, B. & Gary-Bobo, R. J., . "Commitment value of contracts under renegotiation constraints," CORE Discussion Papers RP -1107, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  7. Levent Kockesen & Efe A. Ok, 2004. "Strategic Delegation By Unobservable Incentive Contracts," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 397-424, 04.
  8. Gatsios, Konstantine & Karp, Larry, 1991. "Delegation Games in Customs Unions," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 391-97, April.
  9. Dewatripont, Mathias, 1988. "Commitment through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 377-89, July.
  10. Bensaid, B. & Gary-Bobo, J., 1991. "On the commitment value of contracts under renegotiation constraints," CORE Discussion Papers 1991002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Levent Koçkesen, 2007. "Unobservable Contracts as Precommitments," Economic Theory, Springer, vol. 31(3), pages 539-552, June.
  12. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  13. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  14. 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.
  15. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  16. Polo, Michele & Tedeschi, Piero, 2000. "Delegation games and side-contracting," Research in Economics, Elsevier, vol. 54(1), pages 101-116, March.
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