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Observable and Renegotiable Contracts as Commitments to Cooperate

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  • Guido Merzoni

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Abstract

We study an example of strategic delegation in Cournot duopoly and show that if contracts are both observable and renegotiable before becoming common knowledge at the outset of the delegated game, the strategic value of contracts is preserved, but the set of equilibria is greatly enlarged. Managerial contracts can be used by owners to co-ordinate on any product market equilibrium allowing them to get a level of profit at least as large as the profit obtainable in the strategic delegation equilibrium without renegotiation, which is used as a threat point. The equilibrium set includes joint profit maximisation.

Suggested Citation

  • Guido Merzoni, 2008. "Observable and Renegotiable Contracts as Commitments to Cooperate," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis0801, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
  • Handle: RePEc:dis:wpaper:dis0801
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    File URL: http://dipartimenti.unicatt.it/economia_internazionale_istituzioni_sviluppo_0801.pdf
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    3. Michael L. Katz, 2006. "Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 685-706, September.
    4. Levent Koçkesen & Efe A. Ok, 2004. "Strategic Delegation By Unobservable Incentive Contracts," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 397-424.
    5. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    6. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
    7. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-646, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Delegation; Observability; Renegotiation; Collusion;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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