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Strategic Determination of Renegotiation Costs

  • Akitoshi Muramoto

    (Graduate School of Economics, Kyoto University)

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    Recently, some literature on incomplete contracts studies the cases where renegotiations take place inefficiently. We extend the incomplete contract model in Hart (2009) by assuming that one party chooses an action which affects renegotiation costs. In our model, renegotiation costs are determined endogenously. We characterize the condition that she can get higher payoff by manipulating renegotiation costs than when she cannot manipulate renegotiation costs and renegotiations take place efficiently. Whereas she chooses positive renegotiation costs, renegotiations never occur on the equilibrium paths. They work just as "credible threat". Her equilibrium share ratio of the ex ante bargaining surplus is higher than her bargaining power. As an application, we discuss an investment problem by using a variant of our basic model. We show that the agents mitigate the investment problem by setting some positive renegotiation costs and increasing a high skilled agent's share ratio of the ex ante bargaining surplus to give her larger incentive of investment.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP877.pdf
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    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 877.

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    Length: 23pages
    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:kyo:wpaper:877
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    1. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
    2. Oliver Hart & John Moore, 2006. "Contracts as Reference Points," NBER Working Papers 12706, National Bureau of Economic Research, Inc.
    3. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
    4. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
    5. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    6. Oliver Hart, 2009. "Hold-Up, Asset Ownership, and Reference Points-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 267-300, February.
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