IDEAS home Printed from https://ideas.repec.org/p/zbw/zewdip/17056.html
   My bibliography  Save this paper

Contract (re-)negotiation with private and common values

Author

Listed:
  • Gretschko, Vitali
  • Wambach, Achim

Abstract

We analyze the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiating a chosen contract. We model this by allowing the principal to propose new contracts any number of times after observing the contract choice of the agent. We propose a characterization of renegotiation-proof states of this (re-)negotiation and show that those states are supported by a perfect Bayesian equilibrium of an infinite horizon game. The characterization of renegotiation-proof states provides a tool, which is both powerful and simple to use, for finding such states in specific environments. 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 states can be renegotiation-proof. With common values of the "Rothschild-Stiglitz" type inefficient and (partial) pooling states may be renegotiation-proof.

Suggested Citation

  • Gretschko, Vitali & Wambach, Achim, 2017. "Contract (re-)negotiation with private and common values," ZEW Discussion Papers 17-056, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:17056
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/171740/1/1006255125.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Johannes Hörner & Larry Samuelson, 2011. "Managing Strategic Buyers," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 379-425.
    2. Maestri, Lucas, 2017. "Dynamic contracting under adverse selection and renegotiation," Journal of Economic Theory, Elsevier, vol. 171(C), pages 136-173.
    3. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    4. Strausz, Roland, 2012. "Mediated contracts and mechanism design," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1280-1290.
    5. Hannu Vartiainen, 2013. "Auction Design Without Commitment," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 316-342, April.
    6. Martin Pollrich, 2017. "Mediated audits," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 44-68, March.
    7. Krasa, Stefan, 1999. "Unimprovable Allocations in Economies with Incomplete Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 144-168, July.
    8. Evans, Robert & Reiche, Sönje, 2015. "Contract design and non-cooperative renegotiation," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1159-1187.
    9. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    10. Neeman, Zvika & Pavlov, Gregory, 2013. "Ex post renegotiation-proof mechanism design," Journal of Economic Theory, Elsevier, vol. 148(2), pages 473-501.
    11. Beaudry, Paul & Poitevin, Michel, 1993. "Signalling and Renegotiation in Contractual Relationships," Econometrica, Econometric Society, vol. 61(4), pages 745-782, July.
    12. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 509-540.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    4. Silva, Francisco, 2019. "Renegotiation proof mechanism design with imperfect type verification," Theoretical Economics, Econometric Society, vol. 14(3), July.
    5. Fugger, Nicolas & Gretschko, Vitali & Pollrich, Martin, 2019. "Sequential procurement with limited commitment," ZEW Discussion Papers 19-030, ZEW - Leibniz Centre for European Economic Research.
    6. Tangerås, Thomas & Gick, Wolfgang, 2021. "Contracting with Endogenously Incomplete Commitment: Escape Clauses," Working Paper Series 1390, Research Institute of Industrial Economics.
    7. Qingmin Liu & Konrad Mierendorff & Xianwen Shi & Weijie Zhong, 2019. "Auctions with Limited Commitment," American Economic Review, American Economic Association, vol. 109(3), pages 876-910, March.
    8. Jean Tirole, 2016. "From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection," Econometrica, Econometric Society, vol. 84(4), pages 1291-1343, July.
    9. Hannu Vartiainen, 2003. "Auction Design without Commitment," Working Papers 2003.24, Fondazione Eni Enrico Mattei.
    10. Evans, Robert & Reiche, Sönje, 2015. "Contract design and non-cooperative renegotiation," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1159-1187.
    11. Francesco Giovannoni & Toomas Hinnosaar, 2022. "Pricing Novel Goods," Papers 2208.04985, arXiv.org.
    12. Beccuti, Juan & Möller, Marc, 2018. "Dynamic adverse selection with a patient seller," Journal of Economic Theory, Elsevier, vol. 173(C), pages 95-117.
    13. Beccuti, Juan & Möller, Marc, 2021. "Screening by mode of trade," Games and Economic Behavior, Elsevier, vol. 129(C), pages 400-420.
    14. Laura Doval & Vasiliki Skreta, 2022. "Mechanism Design With Limited Commitment," Econometrica, Econometric Society, vol. 90(4), pages 1463-1500, July.
    15. Robert Evans & Sonje Reiche, 2013. "Mechanism Design and Non-Cooperative Renegotiation," Cambridge Working Papers in Economics 1331, Faculty of Economics, University of Cambridge.
    16. Heller, Yuval & Kuzmics, Christoph, 2020. "Communication, Renegotiation and Coordination with Private Values (Extended Version)," MPRA Paper 102926, University Library of Munich, Germany, revised 26 Jul 2021.
    17. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, vol. 136(1), pages 236-259, September.
    18. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
    19. Yuval Heller & Christoph Kuzmics, 2019. "Renegotiation and Coordination with Private Values," Graz Economics Papers 2019-10, University of Graz, Department of Economics.
    20. Mohammad Akbarpour & Shengwu Li, 2020. "Credible Auctions: A Trilemma," Econometrica, Econometric Society, vol. 88(2), pages 425-467, March.

    More about this item

    Keywords

    principal-agent models; renegotiation; Coase-conjecture;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:17056. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/zemande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.