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Complementarity and inefficient renegotiation: an incomplete contract approach

Author

Listed:
  • Akitoshi Muramoto

    (Komazawa University)

Abstract

In business, wage renegotiations often result in dead weight losses (e.g, a delay in production or labor strikes). We present a model in which one boss and two employees sign a wage contract before knowing what the future revenue will be. Because of the inefficiency of renegotiation, the optimal wage contract minimizes the probability of renegotiation. The boss will prefer to renegotiate when the contracted bonus is high compared to the realized revenue, whereas the employees will when it is relatively low. We show that the probability of renegotiation under the optimal contract and the expected efficiency loss from renegotiation increase as technology becomes more complementary.

Suggested Citation

  • Akitoshi Muramoto, 2016. "Complementarity and inefficient renegotiation: an incomplete contract approach," Economics Bulletin, AccessEcon, vol. 36(2), pages 721-728.
    • Handle: RePEc:ebl:ecbull:eb-14-00998
    as

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    References listed on IDEAS

    as
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    3. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, Decembrie.
    4. Akitoshi Muramoto, 2013. "Strategic Determination of Renegotiation Costs," KIER Working Papers 877, Kyoto University, Institute of Economic Research.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Wage bargaining; Shapley value; Inefficient renegotiations;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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