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Contract, Mechanism Design, and Technological Detail

  • Joel Watson

This paper develops a theoretical framework for studying contract and enforcement in settings with nondurable trading opportunities and complete but unverifiable information. The framework explicitly accounts for the parties’ individual trade actions. The sets of implementable state-contingent payoffs, under various assumptions about renegotiation opportunities, are characterized and compared. The results indicate the benefit of modeling trade actions as individual, rather than as public, and they highlight the usefulness of a structured game-theoretic framework for applied research.

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Paper provided by UCLA Department of Economics in its series Theory workshop papers with number 505798000000000006.

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Date of creation: 31 Oct 2002
Date of revision:
Handle: RePEc:cla:uclatw:505798000000000006
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  1. 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.
  2. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Harvard Institute of Economic Research Working Papers 1863, Harvard - Institute of Economic Research.
  3. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
  4. Kalai, Ehud & Ledyard, John O., 1998. "Repeated Implementation," Journal of Economic Theory, Elsevier, vol. 83(2), pages 308-317, December.
  5. 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.
  6. Roberto Serrano, 2009. "On Watson's Non-Forcing Contracts and Renegotiation," Economics Bulletin, AccessEcon, vol. 29(3), pages 2350-2360.
  7. Jean-Jacques LAFFONT & Jean TIROLE, 1990. "Adverse Selection and Renegotiation in Procurement," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9005, Université de Lausanne, Faculté des HEC, DEEP.
  8. 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.
  9. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
  10. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  11. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  12. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," Harvard Institute of Economic Research Working Papers 1846, Harvard - Institute of Economic Research.
  13. Andrew Postlewaite, 2007. "Courts of Law and Unforeseen Contingencies," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(3), pages 662-684, October.
  14. Dewatripont, Mathias, 1989. "Renegotiation and Information Revelation over Time: The Case of Optimal Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 589-619, August.
  15. Thomas P. Lyon & Eric Rasmusen, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Working Papers 2004-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  16. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  17. 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.
  18. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  19. Alan Schwartz & Joel Watson, . "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.
  20. 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.
  21. Eric Maskin, 1998. "Nash Equilibrium and Welfare Optimality," Harvard Institute of Economic Research Working Papers 1829, Harvard - Institute of Economic Research.
  22. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
  23. 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.
  24. 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.
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