Consider a contract between two players, describing the payment an agent obtains from the principal, in exchange for a good or service supplied. At each point in time, either player may unilaterally demand a renegotiation of the contract, involving renegotiation costs for both players. Players’ payoffs from trade under the contract, as well as from a renegotiated contract, are stochastic, following the exponential of a L´evy process. It is argued that the optimal strategy for each player is to require a renegotiation when the contract payment relative to the outcome of a renegotiation passes a certain threshold, depending on the stochastic processes, the discount rate, and the renegotiation costs. There is strategic substitutability in the choice of thresholds, so that if one player becomes more aggressive by choosing a threshold closer to unity, the other player becomes more passive. If players may invest in order to reduce the renegotiation costs, there will be over-investment compared to the welfare maximizing levels.
|Date of creation:||28 Oct 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hart, Oliver D & Moore, John, 1988.
"Incomplete Contracts and Renegotiation,"
Econometric Society, vol. 56(4), pages 755-85, July.
- Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
- Andersen, Torben M. & Stampe Christensen, Morten, 2002. "Contract renewal under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 637-652, April.
- Lebow David E & Saks Raven E & Wilson Beth Anne, 2003. "Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, October.
- Macleod, W.B. & Malcomson, J.M., 1991.
"Investments, Hold Up and the Reform of Market Contracts,"
Cahiers de recherche
9114, Universite de Montreal, Departement de sciences economiques.
- Macleod, W.B. & Malcomson, J.M., 1991. "Investments, Hold Up And The Reform Of Market Contracts," Cahiers de recherche 9114, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Caplin, A. & Leahy, J., 1992.
"Aggregation and Optimization with State-Dependent Pricing,"
Harvard Institute of Economic Research Working Papers
1595, Harvard - Institute of Economic Research.
- Andrew Caplin & John Leahy, 1997. "Aggregation and Optimization with State-Dependent Pricing," Econometrica, Econometric Society, vol. 65(3), pages 601-626, May.
- Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Discussion Papers 1992_15, Columbia University, Department of Economics.
- Danziger, Leif, 1983. "Price Adjustments with Stochastic Inflation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 699-707, October.
- repec:cup:cbooks:9780521637329 is not listed on IDEAS
- Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994.
"Renegotiation Design with Unverifiable Information,"
Econometric Society, vol. 62(2), pages 257-82, March.
- Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
- Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1994. "Renegotiation design with unverifiable information," ULB Institutional Repository 2013/9591, ULB -- Universite Libre de Bruxelles.
- Andrew C. Caplin & Daniel F. Spulber, 1987.
"Menu Costs and the Neutrality of Money,"
NBER Working Papers
2311, National Bureau of Economic Research, Inc.
- Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
- Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
When requesting a correction, please mention this item's handle: RePEc:hhs:osloec:2004_020. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rhiana Bergh-Seeley)
If references are entirely missing, you can add them using this form.