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Contract and Mechanism Design in Settings with Multi-Period Trade

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  • Watson, Joel

Abstract

This paper presents analysis of contractual settings with complete but unverifiable information and where trade consists of a sequence of verifiable productive actions, between which renegotiation can occur. The main result identifies an equivalent, simplified model that can be used to calculate the set of implementable value functions. The result also shows that the detrimental effects of renegotiation between productive actions can be counteracted when the parties can sufficiently communicate with the external enforcer over time. Corollary results address the form of optimal contracts and the effect of irreversible productive actions.

Suggested Citation

  • Watson, Joel, 2006. "Contract and Mechanism Design in Settings with Multi-Period Trade," University of California at San Diego, Economics Working Paper Series qt63s1s3j6, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt63s1s3j6
    as

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    File URL: https://www.escholarship.org/uc/item/63s1s3j6.pdf;origin=repeccitec
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    References listed on IDEAS

    as
    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    2. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
    3. Yeon-Koo Che & Jozsef Sakovics, 2004. "Contractual Remedies to the Holdup Problem: A Dynamic Perspective," Edinburgh School of Economics Discussion Paper Series 100, Edinburgh School of Economics, University of Edinburgh.
    4. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 39-56.
    5. Yeon-Koo Che & József Sákovics, 2004. "A Dynamic Theory of Holdup," Econometrica, Econometric Society, vol. 72(4), pages 1063-1103, July.
    6. Bull, Jesse & Watson, Joel, 2007. "Hard evidence and mechanism design," Games and Economic Behavior, Elsevier, vol. 58(1), pages 75-93, January.
    7. Eric Maskin, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 23-38.
    8. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
    9. Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
    10. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, vol. 4(3), pages 1-20, July.
    11. 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.
    12. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
    13. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 2-31, April.
    14. Alan Schwartz & Joel Watson, "undated". "The Law and Economics of Costly Contracting," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1004, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    15. 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.
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    Cited by:

    1. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.

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