Double Moral Hazard and Renegotiation
AbstractWe examine renegotiation in a double moral hazard model when both the principal and the agent are allowed to make a renegotiation offer to a self-interested arbitrator at the renegotiation stage even though the principal proposes an initial contract. Under a belief restriction, any perfect-Bayesian equilibrium leads to an allocation that is superior to the second-best allocation of the standard double moral hazard model without renegotiation. The result of this paper gives some reasons for the existence of intermediary organizations such as holding companies, law houses, consulting firms, investment banks or venture capital if it is costly to introduce a third party a la Holmstrom (1982). The result can also provide the rationalization for a fund set up by a group of firms of the industry in which their product is legally required to be recyclable.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 563.
Length: 26 pages
Date of creation: Jan 2003
Date of revision:
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renegotiation; double moral hazard; intermediary organization.;
Other versions of this item:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
- Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
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