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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. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  2. Ariel Rubinstein & Asher Wolinsky, 1989. "Renegotiation-Proof Implementation and Time Preferences," Discussion Papers 850, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Ching-to Albert Ma, 1991. "Adverse Selection in Dynamic Moral Hazard," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 255-275.
  6. Fudenberg, Drew & Tirole, Jean, 1990. "Moral Hazard and Renegotiation in Agency Contracts," Econometrica, Econometric Society, vol. 58(6), pages 1279-1319, November.
  7. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  8. Benjamin E. Hermalin and Michael L. Katz., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Economics Working Papers 90-141, University of California at Berkeley.
  9. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  11. repec:crs:wpaper:9302 is not listed on IDEAS
  12. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. 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.
  14. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September.
  15. Grossman, Sanford J. & Perry, Motty, 1986. "Perfect sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 39(1), pages 97-119, June.
  16. 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.
  17. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
  18. 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.
  19. Ben-Porath, Elchanan & Dekel, Eddie, 1992. "Signaling future actions and the potential for sacrifice," Journal of Economic Theory, Elsevier, vol. 57(1), pages 36-51.
  20. J. Farrell, 2010. "Meaning and Credibility in Cheap Talk Games," Levine's Working Paper Archive 533, David K. Levine.
  21. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-51, Spring.
  22. Allen, Franklin & Gale, Douglas, 1992. "Measurement Distortion and Missing Contingencies in Optimal Contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(1), pages 1-26, January.
  23. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
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