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Moral Hazard and Verifiability: The Effects of Renegotiation in Agency

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  • Benjamin E. Hermalin and Michael L. Katz.

Abstract

The authors examine the effects of renegotiation in an agency relationship. They show how renegotiation affects (1) the set of actions the principal can induce the agent to take and (2) the cost of implementing a given action. The authors show that, when the principal receives an unverifiable signal of the agent's action, renegotiation can improve welfare. This result stands in contrast to earlier findings that renegotiation lowers welfare when the principal receives no signal about the agent's action prior to renegotiation. Copyright 1991 by The Econometric Society.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
  • Handle: RePEc:ucb:calbwp:90-141
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