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Renegotiation-Proof Third-Party Contracts under Asymmetric Information

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  • Emanuele Gerratana

    (SIPA, Columbia University)

  • Levent Kockesen

    () (Koç University)

Abstract

This paper characterizes the equilibrium outcomes of two-stage games in which the second mover has private information and can sign renegotiable contracts with a neutral third-party. Our aim is to understand whether renegotiation-proof third-party contracts can confer a strategic advantage on the second mover. We first analyze non-renegotiable contracts and show that a “folk theorem” holds: Any outcome in which the second mover best responds to the first mover’s action and the first mover obtains a payoff at least as large as his “individually rational payoff” can be supported. Renegotiation-proofness imposes some restrictions, which is most transparent in games with externalities, i.e., games in which the first mover’s payoff increases (or decreases) in the second mover’s action. In such games, a similar folk theorem holds with renegotation-proof contracts as well, but the firstmover’s individually rational payoff is in general higher.

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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 1208.

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Length: 41 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:koc:wpaper:1208

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Related research

Keywords: Third-Party Contracts; Strategic Delegation; Renegotiation; Asymmetric Information; Renegotiation-Proofness; Durability.;

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  1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760.
  2. Gerratana Emanuele & Koçkesen Levent, 2012. "Strategic Effects of Renegotiation-Proof Contracts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-49, July.
  3. Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-43, September.
  4. 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..
  5. 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.
  6. Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991. "Competing vertical structures : precommitment and renegotiation," CEPREMAP Working Papers (Couverture Orange) 9125, CEPREMAP.
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