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Optimality and Renegotiation in Dynamic Contracting

  • Battaglini, Marco

We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation-proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non-linearity of the problem, the optimal equilibrium allocation is unique.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5014.

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Date of creation: Apr 2005
Date of revision:
Handle: RePEc:cpr:ceprdp:5014
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  1. Alessandro Lizzeri, 2003. "Efficient Sorting in a Dynamic Adverse Selection Model," Theory workshop papers 505798000000000098, UCLA Department of Economics.
  2. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
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  15. repec:oup:restud:v:57:y:1990:i:4:p:597-625 is not listed on IDEAS
  16. Marco Battaglini, 2005. "Long-Term Contracting with Markovian Consumers," American Economic Review, American Economic Association, vol. 95(3), pages 637-658, June.
  17. 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.
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  21. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
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