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Incomplete Information, Renegotiation, and Breach of Contract

Author

Listed:
  • Jihong Lee

    (Birkbeck College, University of London)

Abstract

Once a contract has been agreed by two agents, the problem of renegotiating breach under two-sided asymmetric information on the agents' outside options is equivalent to the problem of bilateral trade with uncertain gains. Thus, the theorem of Myerson and Satterthwaite (1983) implies the impossibility of efficient renegotiation. We also show that, assuming no renegotiation, the optimal breach mechanism in this setting corresponds to the expectation damage rule.

Suggested Citation

  • Jihong Lee, 2005. "Incomplete Information, Renegotiation, and Breach of Contract," Economics Bulletin, AccessEcon, vol. 3(5), pages 1-7.
    • Handle: RePEc:ebl:ecbull:eb-04c70013
    as

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    File URL: http://www.accessecon.com/pubs/EB/2005/Volume3/EB-04C70013A.pdf
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    References listed on IDEAS

    as
    1. Chung, Tai-Yeong, 1992. "On the Social Optimality of Liquidated Damage Clauses: An Economic Analysis," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 280-305, April.
    2. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    3. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
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    Cited by:

    1. Jihong Lee, 2008. "Unforeseen Contingency and Renegotiation with Asymmetric Information," Economic Journal, Royal Economic Society, vol. 118(528), pages 678-694, April.
    2. Yuxun Zhou & Mohammad Mafizur Rahman & Rasheda Khanam & Brad R. Taylor, 2023. "Alternative Method to Resolve the Principal–Principal Conflict—A New Perspective Based on Contract Theory and Negotiation," Mathematics, MDPI, vol. 11(2), pages 1-30, January.
    3. Jihong Lee, 2008. "Unforeseen Contingency and Renegotiation with Asymmetric Information," Economic Journal, Royal Economic Society, vol. 118(528), pages 678-694, April.

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    More about this item

    Keywords

    Contract Breach;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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