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Renegotiation and Optimality in Agency Contracts

Listed author(s):
  • Ching-To Albert Ma

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.

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File URL: http://hdl.handle.net/10.2307/2297879
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 61 (1994)
Issue (Month): 1 ()
Pages: 109-129

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Handle: RePEc:oup:restud:v:61:y:1994:i:1:p:109-129.
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