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Renegotiation and Optimality in Agency Contracts

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Abstract

We analyse renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that that action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient.
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Suggested Citation

  • Ma, C.A., 1991. "Renegotiation and Optimality in Agency Contracts," Papers 29, Stanford - Institute for Thoretical Economics.
  • Handle: RePEc:fth:stante:29
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    Keywords

    contracts ; economic models;

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