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Strategic Determination of Renegotiation Costs

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  • Akitoshi Muramoto

    (Graduate School of Economics, Kyoto University)

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    Abstract

    Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as "credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss an investment problem by using a variant of our basic model. We show that the agents mitigate the investment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP877.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 877.

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    Length: 23pages
    Date of creation: Sep 2013
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    Handle: RePEc:kyo:wpaper:877

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    1. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
    2. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Ernst Fehr & Oliver D. Hart & Christian Zehnder, 2008. "Contracts as Reference Points - Experimental Evidence," NBER Working Papers 14501, National Bureau of Economic Research, Inc.
    4. Oliver Hart & John Moore, 2007. "Contracts as Reference Points," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 170, Edinburgh School of Economics, University of Edinburgh.
    5. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 15-80, Wharton School Rodney L. White Center for Financial Research.
    6. Oliver Hart, 2009. "Hold-Up, Asset Ownership, and Reference Points-super-," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(1), pages 267-300, February.
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