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Simple Efficient Contracts in Complex Environments

The paper studies a general model of hold-up in a setting encompassing the models of Segal (1999) and Che and Hausch (1999) among others. It is shown that if renegotiation is modelled as an infinite-horizon non-cooperative bargaining game then, with a simple initial contract, an efficient equilibrium will generally exist. The contract gives authority to one party to set the terms of trade and gives the other party a non-expiring option to trade at these terms. The difference from standard results arises because the existing contract ensures that the renegotiation game has multiple equilibria; the multiplicity of continuation equilibria can be used to enforce efficient investment.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0627.

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Length: 43
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:cam:camdae:0627
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References listed on IDEAS
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  1. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  2. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
  3. Lorne Carmichael & W. Bentley MacLeod, 2003. "Caring About Sunk Costs: A Behavioral Solution to Holdup Problems with Small Stakes," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 106-118, April.
  4. Che, Y.K. & Hausch, D.B., 1997. "Cooperative Investments and the Value of Contracting," Working papers 9714, Wisconsin Madison - Social Systems.
  5. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
  6. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  7. Che,Y.-K. & Sakovics,J., 2001. "A dynamic theory of holdup," Working papers 25, Wisconsin Madison - Social Systems.
  8. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  9. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  10. 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.
  11. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  12. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
  13. repec:oup:restud:v:66:y:1999:i:1:p:83-114 is not listed on IDEAS
  14. Hermalin, Benjamin E. & Katz, Michael L., 1990. "Moral Hazard and Verifiability: The Effects of Renegotiation in Agency," Department of Economics, Working Paper Series qt1678w3w9, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  15. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  16. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  17. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  18. Williamson, Oliver E, 1979. "Transaction-Cost Economics: The Governance of Contractural Relations," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 233-61, October.
  19. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 2002. "On partial contracting," ULB Institutional Repository 2013/9627, ULB -- Universite Libre de Bruxelles.
  20. repec:oup:restud:v:66:y:1999:i:1:p:115-38 is not listed on IDEAS
  21. repec:oup:restud:v:66:y:1999:i:1:p:39-56 is not listed on IDEAS
  22. repec:oup:restud:v:59:y:1992:i:3:p:473-94 is not listed on IDEAS
  23. repec:oup:restud:v:58:y:1991:i:5:p:1031-42 is not listed on IDEAS
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