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Renegotiation of Sales Contracts

  • Matthews, Steven A

This paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort. Unlike in previous models, a contract contains just one scheme and the agent has the renegotiation bargaining power. All equilibria satisfying a weak forward-induction refinement are shown to be (second-best) efficient. Renegotiation necessarily occurs. If the effort set is rich, the initial contract must be a sales contract 'selling the project' to the agent. Thus, a party (the principal) who has an inherently weak renegotiation position should sometimes insist on a simple initial contract. Copyright 1995 by The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 63 (1995)
Issue (Month): 3 (May)
Pages: 567-89

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Handle: RePEc:ecm:emetrp:v:63:y:1995:i:3:p:567-89
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  1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  2. Ariel Rubinstein & Asher Wolinsky, 1990. "Renegotiation-Proof Implementation and Time Preferences," STICERD - Theoretical Economics Paper Series 215, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  3. Allen, F. & Gale, D., 1990. "Measurement Distortion And Missing Contingencies In Optimal Contracts," Weiss Center Working Papers 26-90, Wharton School - Weiss Center for International Financial Research.
  4. Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June.
  5. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  6. J. Farrell, 2010. "Meaning and Credibility in Cheap Talk Games," Levine's Working Paper Archive 533, David K. Levine.
  7. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September.
  8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  9. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  10. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-97, November.
  11. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  12. repec:oup:qjecon:v:102:y:1987:i:2:p:179-221 is not listed on IDEAS
  13. repec:crs:wpaper:9302 is not listed on IDEAS
  14. R. E. Kihlstrom & Steven A. Matthews, 1988. "Managerial Incentives in An Entrepreneurial Stock Market Model," Discussion Papers 769, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. repec:oup:qjecon:v:106:y:1991:i:1:p:255-75 is not listed on IDEAS
  16. repec:oup:restud:v:58:y:1991:i:5:p:1031-42 is not listed on IDEAS
  17. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  18. Hermalin, Benjamin E & Katz, Michael L, 1991. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Econometrica, Econometric Society, vol. 59(6), pages 1735-53, November.
  19. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  20. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-51, Spring.
  21. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  22. Huberman, Gur & Kahn, Charles M, 1988. "Limited Contract Enforcement and Strategic Renegotiation," American Economic Review, American Economic Association, vol. 78(3), pages 471-84, June.
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