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Option Contracts and Renegotiation in Complex Environments

Author

Listed:
  • Thomas P. Lyon

    (Kelley School of Business, Indiana University)

  • Eric Rasmusen

    (CIRJE, Faculty of Economics, University of Tokyo and Kelley School of Business, Indiana University)

Abstract

Hart & Moore (1999) construct a model to show that contracts perform poorly in complex environments when the state of the world is unverifiable and renegotiation cannot be ruled out. They implicitly assume one player can extort payment from another by threatening to take an inefficient action which hurts both of them. We show that without this assumption a simple "buyer option" contract can implement the first-best even as complexity becomes severe.

Suggested Citation

  • Thomas P. Lyon & Eric Rasmusen, 2001. "Option Contracts and Renegotiation in Complex Environments," CIRJE F-Series CIRJE-F-118, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2001cf118
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2001/2001cf118.pdf
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    Cited by:

    1. Joel Watson, 2007. "Contract, Mechanism Design, and Technological Detail," Econometrica, Econometric Society, vol. 75(1), pages 55-81, January.

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