Adverse Selection and Renegotiation in Procurement
As was shown by M. Dewatripont (1986), optimal long-term contracts under asymmetric information are generally not time-consistent. This paper fully characterizes the equilibrium of a two-period procurement model with commitment and renegotiation. It also analyzes whether renegotiated long-term contracts yield outcomes resembling those under either unrenegotiated long-term contracts or a sequence of short-term contracts, and links the analysis with the multiple unit durable good monopoly problem. Copyright 1990 by The Review of Economic Studies Limited.
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