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Non Verifiability, Costly Renegotiation and Efficiency

  • Jerry R. GREEN
  • Jean-Jacques LAFFONT

We study the implications of the non verifiability of information for the allocation of resources and the bearing of risk in a two party relationship. We consider a two step approach. In step one the two parties define a non contingent contract which will be executed when the non verifiable information will become common knowledge of the two parties. In step two a costly exogenous bargaining process takes place. The main result is that with risk neutrality it is possible to induce the first best as a Nash equilibrium of the contract without having to renegotiate. A counter-example shows that the result does not extend to risk averse parties for which non verifiability of information will impede in general risk sharing.

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Article provided by GENES in its journal Annals of Economics and Statistics.

Volume (Year): (1994)
Issue (Month): 36 ()
Pages: 81-95

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Handle: RePEc:adr:anecst:y:1994:i:36:p:04
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