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Common Values and the Coase Conjecture: Inefficiencies in Frictionless Contract (Re-)Negotiation

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  • Gretschko, Vitali
  • Wambach, Achim

Abstract

We consider the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiate a chosen contract. To analyze this problem, we propose an infinite horizon negotiation protocol in which renegotiation is frictionless, executed without delay and there are no restrictions on how many times the contracts can be renegotiated. We provide a general characterization of renegotiation-proof outcomes and show that those outcomes are supported by a Perfect Bayesian Equilibrium of the negotiation game. The general characterization of renegotiation-proof outcomes provides a powerful and simple to use tool for finding such outcomes in specific environments. Thus, we proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the 'Spence' type only fully efficient and separating contracts can be renegotiation proof. However, with common values of the 'Rothschild-Stiglitz' type inefficient and (partial) pooling contracts may constitute renegotiation-proof outcomes.

Suggested Citation

  • Gretschko, Vitali & Wambach, Achim, 2015. "Common Values and the Coase Conjecture: Inefficiencies in Frictionless Contract (Re-)Negotiation," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113064, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113064
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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