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Option Contracts and Renegotiation in Complex Environments

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  • Thomas P. Lyon

    (Kelley School of Business, Indiana University)

  • Eric Rasmusen

    (CIRJE, Faculty of Economics, University of Tokyo and Kelley School of Business, Indiana University)

Abstract

Hart & Moore (1999) construct a model to show that contracts perform poorly in complex environments when the state of the world is unverifiable and renegotiation cannot be ruled out. They implicitly assume one player can extort payment from another by threatening to take an inefficient action which hurts both of them. We show that without this assumption a simple "buyer option" contract can implement the first-best even as complexity becomes severe.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2001/2001cf118.pdf
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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-118.

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Length: 28 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:tky:fseres:2001cf118

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Cited by:
  1. Joel Watson, 2002. "Contract, Mechanism Design, and Technological Detail," Theory workshop papers 505798000000000006, UCLA Department of Economics.

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