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Mechanism Design with Renegotiation and Costly Messages

According to standard theory, the set of implementable outcome functions is reduced if the mechanism or contract can be renegotiated ex post. In some cases contracts can achieve nothing and so, for example, the holdup problem may be severe. This paper shows that if the mechanism is designed in such a way that sending a message involves a small cost (e.g., the opportunity cost of time spent attending a hearing) then ex post renegotiation essentially does not restrict the set of implementable functions. Any Pareto-efficient, bounded social choice function can be implemented in subgame-perfect equilibrium, for any strictly positive message cost.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0626.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0626.

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Length: 20
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:cam:camdae:0626
Note: ET
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

References listed on IDEAS
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  1. Eric Maskin & John Moore, 1998. "Implementation and renegotiation," LSE Research Online Documents on Economics 19350, London School of Economics and Political Science, LSE Library.
  2. Glazer, Jacob & Rubinstein, Ariel, 1998. "Motives and Implementation: On the Design of Mechanisms to Elicit Opinions," Journal of Economic Theory, Elsevier, vol. 79(2), pages 157-173, April.
  3. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 83-114.
  4. Watson, Joel, 2002. "Contract, Mechanism Design, and Technological Detail," University of California at San Diego, Economics Working Paper Series qt18x0r2nn, Department of Economics, UC San Diego.
  5. Che, Y.K. & Hausch, D.B., 1997. "Cooperative Investments and the Value of Contracting," Working papers 9714, Wisconsin Madison - Social Systems.
  6. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  7. Ariel Rubinstein & Asher Wolinsky, 1990. "Renegotiation-Proof Implementation and Time Preferences," STICERD - Theoretical Economics Paper Series 215, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  8. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 57-82.
  9. Bull, Jesse & Watson, Joel, 2002. "Evidence Disclosure and Verfiability," University of California at San Diego, Economics Working Paper Series qt19p7z2gm, Department of Economics, UC San Diego.
  10. Maskin, Eric & Sjostrom, Tomas, 2002. "Implementation theory," Handbook of Social Choice and Welfare, in: K. J. Arrow & A. K. Sen & K. Suzumura (ed.), Handbook of Social Choice and Welfare, edition 1, volume 1, chapter 5, pages 237-288 Elsevier.
  11. Jerry R. Green & Jean-Jacques Laffont, 1986. "Partially Verifiable Information and Mechanism Design," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 447-456.
  12. repec:cdl:ucsdec:142242 is not listed on IDEAS
  13. Sandeep Baliga & Tomas Sjostrom, 2005. "Contracting with Third Parties," Levine's Bibliography 784828000000000408, UCLA Department of Economics.
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