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Contract Renegotiation and Coasian Dynamics

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  • Oliver D. Hart
  • Jean Tirole

Abstract

Consider a long-term relationship between a seller and a buyer whose valuation (for a per-period service or a durable good) is private. As trade progresses, the valuation will be partially revealed, and it may be impossible for the parties to commit ex-ante not to take advantage of this. We analyse this situation first by supposing that the parties can sign a sequence of short-term contracts; and secondly by supposing that they can sign a long-term contract, but cannot commit not to renegotiate it later. We find a close relationship in the second case between the optimal long-term contract and the non-commitment outcome in the standard Coasian durable good model. Our results also have implications for hidden-information principal-agent models.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
  • Handle: RePEc:mit:worpap:442
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