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Strategic Effects of Renegotiation-Proof Contracts

Author

Listed:
  • Gerratana Emanuele

    () (SIPA, Columbia University)

  • Koçkesen Levent

    () (Koç University)

Abstract

It is well known that non-renegotiable contracts with third parties may have an effect on the outcome of a strategic interaction and thus serve as a commitment device. We address this issue when contracts are renegotiable. More precisely, we analyze the equilibrium outcomes of two-stage games with renegotiation-proof third-party contracts in relation to the equilibrium outcomes of the same game without contracts. We assume that one of the parties in the contractual relationship is unable to observe everything that happens in the game when played by the other party. We first show that when contracts are non-renegotiable, the set of equilibrium outcomes of the game with contracts is restricted to a subset of Nash equilibrium outcomes of the original game. Introducing renegotiation, in general, imposes further constraints and in some games implies that only subgame perfect equilibrium outcomes of the original game can be supported. However, there is a large class of games in which non-subgame perfect equilibrium outcomes can also be supported, and hence, third-party contracts still have strategic implications even when they are renegotiable.

Suggested Citation

  • Gerratana Emanuele & Koçkesen Levent, 2012. "Strategic Effects of Renegotiation-Proof Contracts," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-49, July.
  • Handle: RePEc:bpj:bejtec:v:12:y:2012:i:1:n:23
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Emanuele Gerratana & Levent Kockesen, 2012. "Renegotiation-Proof Third-Party Contracts under Asymmetric Information," Koç University-TUSIAD Economic Research Forum Working Papers 1208, Koc University-TUSIAD Economic Research Forum.
    2. Aristotelis Boukouras, 2015. "Separation of Ownership and Control: Delegation as a Commitment Device," Discussion Papers in Economics 15/02, Department of Economics, University of Leicester.
    3. Emanuele Gerratana & Levent Koçkesen, 2015. "Commitment without reputation: renegotiation-proof contracts under asymmetric information," Review of Economic Design, Springer;Society for Economic Design, vol. 19(3), pages 173-209, September.
    4. Alonso-Pauli, Eduard & Bru, Lluís, 2018. "Strategic delegation in procurement," MPRA Paper 84293, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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