Double Moral Hazard and Renegotiation
We examine renegotiation in a double moral hazard model when both the principal and the agent are allowed to make a renegotiation offer to a self-interested arbitrator at the renegotiation stage even though the principal proposes an initial contract. Under a belief restriction, any perfect-Bayesian equilibrium leads to an allocation that is superior to the second-best allocation of the standard double moral hazard model without renegotiation. The result of this paper gives some reasons for the existence of intermediary organizations such as holding companies, law houses, consulting firms, investment banks or venture capital if it is costly to introduce a third party a la Holmstrom (1982). The result can also provide the rationalization for a fund set up by a group of firms of the industry in which their product is legally required to be recyclable.
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- Benjamin E. Hermalin and Michael L. Katz., 1990.
"Moral Hazard and Verifiability: The Effects of Renegotiation in Agency,"
Economics Working Papers
90-141, University of California at Berkeley.
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Wiley Blackwell, vol. 68(1), pages 1-20, January.
- Ishiguro, S. & Itoh, H., 1998. "Moral Hazard and Renegotiation with Multiple Agents," ISER Discussion Paper 0471, Institute of Social and Economic Research, Osaka University.
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"Renegotiation of Sales Contracts,"
Econometric Society, vol. 63(3), pages 567-89, May.
- Srabana Gupta & Richard E. Romano, 1998. "Monitoring the Principal with Multiple Agents," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 427-442, Summer.
- Osano, Hiroshi, 1998. "Moral hazard and renegotiation in multi-agent incentive contracts when each agent makes a renegotiation offer," Journal of Economic Behavior & Organization, Elsevier, vol. 37(2), pages 207-230, October.
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