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Contract Renegotiation and Coasian Dynamics


  • Oliver D. Hart
  • Jean Tirole


Consider a long-term relationship between a seller and a buyer whose valuation (for a per-period service or a durable good) is private. As trade progresses, the valuation will be partially revealed, and it may be impossible for the parties to commit ex-ante not to take advantage of this. We analyse this situation first by supposing that the parties can sign a sequence of short-term contracts; and secondly by supposing that they can sign a long-term contract, but cannot commit not to renegotiate it later. We find a close relationship in the second case between the optimal long-term contract and the non-commitment outcome in the standard Coasian durable good model. Our results also have implications for hidden-information principal-agent models.

Suggested Citation

  • Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
  • Handle: RePEc:oup:restud:v:55:y:1988:i:4:p:509-540.

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    References listed on IDEAS

    1. Hugo Sonnenschein, 1968. "The Dual of Duopoly Is Complementary Monopoly: or, Two of Cournot's Theories Are One," Journal of Political Economy, University of Chicago Press, vol. 76, pages 316-316.
    2. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers 674, Cowles Foundation for Research in Economics, Yale University.
    3. Sanyal, Kalyan K & Jones, Ronald W, 1982. "The Theory of Trade in Middle Products," American Economic Review, American Economic Association, vol. 72(1), pages 16-31, March.
    4. McCulloch, Rachel & Johnson, Harry G, 1973. "A Note on Proportionally Distributed Quotas," American Economic Review, American Economic Association, vol. 63(4), pages 726-732, September.
    5. Gene M. Grossman, 1981. "The Theory of Domestic Content Protection and Content Preference," The Quarterly Journal of Economics, Oxford University Press, vol. 96(4), pages 583-603.
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