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Renegotiation-proof Mechanism Design

We study a mechanism design problem under the assumption that renegotiation cannot be prevented. We investigate what kind of equilibria of which mechanisms are renegotiation-proof under a variety of renegotiation procedures, and which social choice functions can be implemented in a way that is renegotiation-proof. In complete information environments, we show that the set of ex post renegotiation-proof implementable social choice functions contains all ex post efficient allocations when there at least three agents, but only budget balanced Groves allocations when there are two agents. In incomplete information environments with correlated beliefs and at least three agents, every ex post efficient social choice function can be implemented in the presence of ex post renegotiation, but with independent private values only social choice functions that are given by budget balanced “Groves in expectations” mechanisms are implementable in such a way. We further show that the requirement of interim renegotiation-proofness does not impose additional restrictions on implementable social choice functions under complete information, but is likely to impose additional restrictions under incomplete information.

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Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20101.

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Date of creation: 2010
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Handle: RePEc:uwo:uwowop:20101
Contact details of provider: Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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  1. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
  2. Alon Klement & Zvika Neeman, 2005. "Against Compromise: A Mechanism Design Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 21(2), pages 285-314, October.
  3. Dirk Bergemann & Juuso Vaimaki, 2000. "Information Acquisition and Efficient Mechanism Design," Cowles Foundation Discussion Papers 1248, Cowles Foundation for Research in Economics, Yale University.
  4. Paul Beaudry & Michel Poitevin, 1995. "Contract Renegotiation: A Simple Framework and Implications for Organization Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 28(2), pages 302-35, May.
  5. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2004.
  6. Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
  7. Forges, Francoise & Minelli, Enrico & Vohra, Rajiv, 2002. "Incentives and the core of an exchange economy: a survey," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 1-41, September.
  8. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
  9. Georg Noeldeke & Klaus Schmidt, 1998. "Sequential Investments and Options to Own," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 633-653, Winter.
  10. Amoros, Pablo, 2004. "Nash implementation and uncertain renegotiation," Games and Economic Behavior, Elsevier, vol. 49(2), pages 424-434, November.
  11. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
  12. Evans, R., 2006. "Mechanism Design with Renegotiation and Costly Messages," Cambridge Working Papers in Economics 0626, Faculty of Economics, University of Cambridge.
  13. Kosenok, Grigory & Severinov, Sergei, 2008. "Individually rational, budget-balanced mechanisms and allocation of surplus," Journal of Economic Theory, Elsevier, vol. 140(1), pages 126-161, May.
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