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Contract, Mechanism Design, and Technological Detail

  • Watson, Joel

This paper develops a theoretical framework for studying contract and enforcement in setting of complete, but unverifiable, information. The main point of the paper is that the consideration of renegotiation necessitates formal examination of other technological constraints, especially those having to do with the timing and nature of inalienable productive decisions. The main technical contributions include (a) results that characterize of the sets of implementable state-contingent payoffs under various assumptions about renegotiation opportunities, and (b) a result establishing conditions under which, when trading opportunities are durable and trade decisions are reversible, stationary contracts are optimal. The analysis refutes the validity of the "mechanism design with ex post renegotiation" program, it demonstrates the validity of other mechanism design models in dynamic environments, and it highlights the need for a more structured game-theoretic framework.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt18x0r2nn.

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Date of creation: 01 Jan 2002
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Handle: RePEc:cdl:ucsdec:qt18x0r2nn
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  1. Laffont, Jean-Jacques & Tirole, Jean., 1988. "Adverse Selection and Renegotiation in Procurement," Working Papers 665, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Schwartz, Alan & Watson, Joel, 2001. "The Law and Economics of Costly Contracting," University of California at San Diego, Economics Working Paper Series qt2wh8m7bv, Department of Economics, UC San Diego.
  3. Ehud Kalai & John O. Ledyard, 1997. "Repeated Implementation," Discussion Papers 1205, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
  5. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  6. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  7. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  8. Bull Jesse, 2008. "Costly Evidence Production and the Limits of Verifiability," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-28, July.
  9. Mathias Dewatripont, 1989. "Renegotiation and information revelation over time: the case of optimal labor contacts," ULB Institutional Repository 2013/9573, ULB -- Universite Libre de Bruxelles.
  10. Luca Anderlini, Leonardo Felli & Andrew Postlewaite, 2003. "Courts of Law and Unforeseen Contingencies," Working Papers gueconwpa~03-03-26, Georgetown University, Department of Economics.
  11. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 115-38, January.
  12. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
  13. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  14. Bull, Jesse & Watson, Joel, 2000. "Evidence Disclosure and Verifiability," University of California at San Diego, Economics Working Paper Series qt6th0060j, Department of Economics, UC San Diego.
  15. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  16. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.
  17. repec:att:wimass:9714 is not listed on IDEAS
  18. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
  19. Roberto Serrano, 2004. "On Watson's Non-Forcing Contracts and Renegotiation," Economics Working Papers 0041, Institute for Advanced Study, School of Social Science.
  20. 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.
  21. Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
  22. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  23. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
  24. Thomas P. Lyon & Eric Rasmusen, 2001. "Option Contracts and Renegotiation in Complex Environments," CIRJE F-Series CIRJE-F-118, CIRJE, Faculty of Economics, University of Tokyo.
  25. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
  26. Eric Maskin, 1998. "Nash Equilibrium and Welfare Optimality," Harvard Institute of Economic Research Working Papers 1829, Harvard - Institute of Economic Research.
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