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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. Bensaid, B. & Gary-Bobo, R., 1993. "On the Commitment Value of Contracts Under Renegotiation Constraints," Papers 9302, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
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  3. 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.
  4. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
  5. Levent Koçkesen, 2007. "Unobservable Contracts as Precommitments," Economic Theory, Springer, vol. 31(3), pages 539-552, June.
  6. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  7. 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.
  8. Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. 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).
  10. Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991. "Competing vertical structures : precommitment and renegotiation," CEPREMAP Working Papers (Couverture Orange) 9125, CEPREMAP.
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  12. Mathias Dewatripont, 1988. "Commitment through renegotiation-proof contacts with third parties," ULB Institutional Repository 2013/9569, ULB -- Universite Libre de Bruxelles.
  13. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  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.
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