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Contract Renegotiation and Coasian Dynamics

Listed author(s):
  • 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.

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File URL: http://hdl.handle.net/10.2307/2297403
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 55 (1988)
Issue (Month): 4 ()
Pages: 509-540

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Handle: RePEc:oup:restud:v:55:y:1988:i:4:p:509-540.
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