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Contract design and non-cooperative renegotiation

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  • Evans, Robert
  • Reiche, Sönje

Abstract

We study a contract design setting in which the contracting parties cannot commit not to renegotiate previous contract agreements. In particular, we characterize the outcome functions that are implementable for an uninformed principal and an informed agent if, having observed the agent's contract choice, the principal can offer a new menu of contracts in its place. An outcome function can be implemented in this setting if and only if it is optimal for the principal for some belief over agent types which is more pessimistic, in the sense of the likelihood ratio order, than the prior. Furthermore, the outcome function cannot be too sensitive to variations in the agent's type. We show that the direct revelation mechanism which implements such a function when renegotiation can be prevented will also implement it in any equilibrium when it cannot, so the standard contract is robust to renegotiation.

Suggested Citation

  • Evans, Robert & Reiche, Sönje, 2015. "Contract design and non-cooperative renegotiation," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1159-1187.
    • Handle: RePEc:eee:jetheo:v:157:y:2015:i:c:p:1159-1187
    DOI: 10.1016/j.jet.2014.12.001
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    Cited by:

    1. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    2. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    3. Gretschko, Vitali & Wambach, Achim, 2017. "Contract (re-)negotiation with private and common values," ZEW Discussion Papers 17-056, ZEW - Leibniz Centre for European Economic Research.
    4. Silva, Francisco, 2019. "Renegotiation proof mechanism design with imperfect type verification," Theoretical Economics, Econometric Society, vol. 14(3), July.
    5. Matteo Foschi, 2016. "Contracting with Type-Dependent Naïveté," Discussion Papers in Economics 16/03, Division of Economics, School of Business, University of Leicester.

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    More about this item

    Keywords

    Renegotiation; Mechanism design; Contract; Commitment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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