Sales contracts emerge when a principal and an agent in amoral hazard environment cannot prevent themselves from renegotiating their contract. The renegotiation occurs after the agent chooses his unobservable effort, but before its consequences are realized. Unlike previous analyses, a contract is a single sharing rule of the classical variety, and the agent leads to renegotiation. A sales contract transfers the random return wholly to the agent, thereby relieving the principal of concern about his effort. Equilibria exist in which an initial sales contract is agree upon, but subsequently renegotiated to the (second-best) efficient contract. All equilibria satisfying a relatively weak refinement criterion are efficient in this sense; renegotiation does not reduce welfare. When the agent can finely control the probabilities of observable signals, the initial contract in every equilibrium satisfying the criterion must be a sales contract. Two applications are briefly considered, managerial compensation and the timing of new firms' security issues.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
950.
Length: Date of creation: Aug 1991 Date of revision: Handle: RePEc:nwu:cmsems:950
Contact details of provider: Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014 Phone: 847/491-3527 Fax: 847/491-2530 Email: Web page: http://www.kellogg.northwestern.edu/research/math/ More information through EDIRC
Order Information: Email:
For technical questions regarding this item, or to correct its listing, contact: (Fran Walker).
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
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: