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Renegotiation and conflict resolution in relational contracting

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  • Zhao, Rui R.

Abstract

Renegotiation and conflict resolution are studied in relational contracting under subjective evaluation. Renegotiation has three effects. First, it makes the incentive pay scheme low powered: the maximum variation of compensation across performance levels is compressed and the contract is less extreme compared to the case without renegotiation. This effect is stronger when the players are less patient. Second, renegotiation typically renders termination impossible; the contract relies on a “low-morale” mechanism to enforce mutual cooperation. Finally, renegotiation compels the players to resolve their conflicts by selecting a contract that maximizes the lowest possible surplus along the path of the contract.

Suggested Citation

  • Zhao, Rui R., 2012. "Renegotiation and conflict resolution in relational contracting," Games and Economic Behavior, Elsevier, vol. 75(2), pages 964-983.
  • Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:964-983
    DOI: 10.1016/j.geb.2012.02.008
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    References listed on IDEAS

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    More about this item

    Keywords

    Repeated principal–agent; Self-enforcing contracts; Renegotiation; Private evaluation;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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