Contracts adopted with later renegotiation in mind may take simple forms. In a principal-agent model, if renegotiation may occur after the agent chooses efforet, the principal protects against unfavorable renegotiation by "selling the project" to the agent via a sales contract. If only singleton (single-scheme) contracts are feasible, the equilibrium initial contract must be a sales contract if the principal's renegotiation position will be inherently inferior in the sense that (a) the agent will have the bargianing power; (b) the principal will not observe the agent's effort, and (c) the agent has the talent, i.e. a rich set of feasible efforts, to exploint contractual nuances. Renegotiation necessarily occurs, and it yields (second-best) efficient allocations. Even when meny (multiple-scheme) contracts are available, if the selection of a scheme from a menu entails any cost, then the final contract is a singleton and equilibrium renegotiation occurs. If there is any complexity cost to specifying a menuy, the initional contract must also be a singleton; it is necessarily a sales contract if the agent has talent. A weak forward induction refinement criterion is used to obtain these results.
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1051.
Length: Date of creation: Jun 1993 Date of revision: Handle: RePEc:nwu:cmsems:1051
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
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Francesco Squintani, 1999.
"Moral Hazard,"
Discussion Papers
1269, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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