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Contract, Mechanism Design, and Technological Detail

  • Joel Watson

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

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Date of creation: 31 Oct 2002
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Handle: RePEc:cla:uclatw:505798000000000006
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  1. 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.
  2. Kalai, Ehud & Ledyard, John O., 1998. "Repeated Implementation," Journal of Economic Theory, Elsevier, vol. 83(2), pages 308-317, December.
  3. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  4. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  5. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  6. 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.
  7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  8. Jesse Bull, 2006. "Costly Evidence Production and the Limits of Verifiability," Working Papers 0611, Florida International University, Department of Economics.
  9. 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.
  10. 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.
  11. 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.
  12. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. 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.
  18. 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.
  19. Roberto Serrano, 2009. "On Watson'S Non-Forcing Contracts And Renegotiation," Working Papers wp2009_0907, CEMFI.
  20. Bull, Jesse & Watson, Joel, 2004. "Evidence disclosure and verifiability," Journal of Economic Theory, Elsevier, vol. 118(1), pages 1-31, September.
  21. 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.
  22. Eric Maskin & John Moore, 1998. "Implementation and renegotiation," LSE Research Online Documents on Economics 19350, London School of Economics and Political Science, LSE Library.
  23. Maskin, Eric, 1999. "Nash Equilibrium and Welfare Optimality," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 23-38, January.
  24. Moore, John & Repullo, Rafael, 1988. "Subgame Perfect Implementation," Econometrica, Econometric Society, vol. 56(5), pages 1191-1220, September.
  25. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 57-82, January.
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