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Renegotiation-Proof Dynamic Contracts with Private Information

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  • Wang, Cheng

Abstract

This paper studies the issue of renegotiation in a model of dynamic moral hazard. I introduce the notion of a renegotiation-proof dynamic contract. I show that the constraint of renegotiation-proofness can have the effect of setting a higher lower bound to the set of attainable expected utilities of the agent. This result extends the notion of "credit rationing" from the static models of optimal contracting to a dynamic setting, and is useful for thinking about competition for long-term contracts. This result also has implications for the long-run behavior of the expected utility of the agent under dynamic contracting. (Copyright: Elsevier)
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Suggested Citation

  • Wang, Cheng, 2000. "Renegotiation-Proof Dynamic Contracts with Private Information," Staff General Research Papers Archive 5248, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:5248
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    References listed on IDEAS

    as
    1. Espino, Emilio, 2005. "On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information," Journal of Economic Theory, Elsevier, vol. 121(2), pages 192-213, April.
    2. Bohacek Radim, 2005. "Capital Accumulation in Private Information Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-24, December.
    3. Susanne Ohlendorf & Patrick W. Schmitz, 2012. "Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, May.
    4. Ohlendorf, Susanne & Schmitz, Patrick W, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Giat, Yahel & Subramanian, Ajay, 2013. "Dynamic contracting under imperfect public information and asymmetric beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2833-2861.
    2. Wang, Cheng, 2011. "Termination of dynamic contracts in an equilibrium labor market model," Journal of Economic Theory, Elsevier, vol. 146(1), pages 74-110, January.
    3. Li, Shuyun May, 2013. "Optimal lending contracts with long run borrowing constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 964-983.
    4. Notteboom, Theo, 2006. "Chapter 19 Concession Agreements as Port Governance Tools," Research in Transportation Economics, Elsevier, vol. 17(1), pages 437-455, January.
    5. At, Christian & Gabuthy, Yannick, 2015. "Moral hazard and agency relationship in sequential litigation," International Review of Law and Economics, Elsevier, vol. 41(C), pages 86-90.
    6. Zhao, Rui R., 2007. "Dynamic risk-sharing with two-sided moral hazard," Journal of Economic Theory, Elsevier, vol. 136(1), pages 601-640, September.
    7. Espino, Emilio, 2005. "On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information," Journal of Economic Theory, Elsevier, vol. 121(2), pages 192-213, April.
    8. Shuyun May Li, 2009. "Optimal Lending Contracts with Asymmetric Information and Two-sided Limited Commitment or Impatient Entrepreneur," Department of Economics - Working Papers Series 1065, The University of Melbourne.
    9. Shuyun May Li, 2009. "Optimal Lending Contracts with Long Run Borrowing Constraints," Department of Economics - Working Papers Series 1084, The University of Melbourne.
    10. Zhao, Rui R., 2006. "Renegotiation-proof contract in repeated agency," Journal of Economic Theory, Elsevier, vol. 131(1), pages 263-281, November.
    11. Susanne Ohlendorf & Patrick W. Schmitz, 2012. "Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, May.
    12. Shuyun May Li, 2008. "Costly External Finance, Reallocation, and Aggregate Productivity," Department of Economics - Working Papers Series 1044, The University of Melbourne.
    13. repec:eee:jetheo:v:176:y:2018:i:c:p:311-341 is not listed on IDEAS
    14. Ohlendorf, Susanne & Schmitz, Patrick W, 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
    15. Kenneth Daniels & Fernando Díaz & Gabriel Ramírez, 2011. "The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence," Working Papers 28, Facultad de Economía y Empresa, Universidad Diego Portales.
    16. Yaz Terajima & Vincenzo Quadrini & Cesaire Meh, 2009. "Real Effects of Price Stability with Endogenous Nominal Indexation," 2009 Meeting Papers 847, Society for Economic Dynamics.
    17. Meh, Césaire A. & Quadrini, Vincenzo & Terajima, Yaz, 2015. "Limited Nominal Indexation of Optimal Financial Contracts," CEPR Discussion Papers 10330, C.E.P.R. Discussion Papers.
    18. Quadrini, Vincenzo, 2004. "Investment and liquidation in renegotiation-proof contracts with moral hazard," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 713-751, May.

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