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Renegotiation and Optimality in Agency Contracts

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  • Ching-To Albert Ma

Abstract

We analyse renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that that action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient.

Suggested Citation

  • Ching-To Albert Ma, 1994. "Renegotiation and Optimality in Agency Contracts," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 109-129.
  • Handle: RePEc:oup:restud:v:61:y:1994:i:1:p:109-129.
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