IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v157y2015icp1159-1187.html
   My bibliography  Save this article

Contract design and non-cooperative renegotiation

Author

Listed:
  • Evans, Robert
  • Reiche, Sönje

Abstract

We study a contract design setting in which the contracting parties cannot commit not to renegotiate previous contract agreements. In particular, we characterize the outcome functions that are implementable for an uninformed principal and an informed agent if, having observed the agent's contract choice, the principal can offer a new menu of contracts in its place. An outcome function can be implemented in this setting if and only if it is optimal for the principal for some belief over agent types which is more pessimistic, in the sense of the likelihood ratio order, than the prior. Furthermore, the outcome function cannot be too sensitive to variations in the agent's type. We show that the direct revelation mechanism which implements such a function when renegotiation can be prevented will also implement it in any equilibrium when it cannot, so the standard contract is robust to renegotiation.

Suggested Citation

  • Evans, Robert & Reiche, Sönje, 2015. "Contract design and non-cooperative renegotiation," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1159-1187.
    • Handle: RePEc:eee:jetheo:v:157:y:2015:i:c:p:1159-1187
    DOI: 10.1016/j.jet.2014.12.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053114001781
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2014.12.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Forges Francoise, 1994. "Posterior Efficiency," Games and Economic Behavior, Elsevier, vol. 6(2), pages 238-261, March.
    2. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    3. Oliver Hart & John Moore, 1999. "Foundations of Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 115-138.
    4. Strausz, Roland, 2006. "Deterministic versus stochastic mechanisms in principal-agent models," Journal of Economic Theory, Elsevier, vol. 128(1), pages 306-314, May.
    5. Rubinstein, Ariel & Wolinsky, Asher, 1992. "Renegotiation-Proof Implementation and Time Preferences," American Economic Review, American Economic Association, vol. 82(3), pages 600-614, June.
    6. Vijay Krishna & John Morgan, 2008. "Contracting for information under imperfect commitment," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 905-925, December.
    7. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, April.
    8. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-531, May.
    9. Bergemann, Dirk & Pesendorfer, Martin, 2007. "Information structures in optimal auctions," Journal of Economic Theory, Elsevier, vol. 137(1), pages 580-609, November.
    10. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 39-56.
    11. Ausubel, Lawrence M. & Deneckere, Raymond J., 1989. "A direct mechanism characterization of sequential bargaining with one-sided incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 18-46, June.
    12. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
    13. Dewatripont, M. & Maskin, E., 1990. "Contract renegotiation in models of asymmetric information," European Economic Review, Elsevier, vol. 34(2-3), pages 311-321, May.
    14. Green, Jerry R & Laffont, Jean-Jacques, 1987. "Posterior Implementability in a Two-Person Decision Problem," Econometrica, Econometric Society, vol. 55(1), pages 69-94, January.
    15. Jean-Jacques Laffont & Jean Tirole, 1990. "Adverse Selection and Renegotiation in Procurement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(4), pages 597-625.
    16. Neeman, Zvika & Pavlov, Gregory, 2013. "Ex post renegotiation-proof mechanism design," Journal of Economic Theory, Elsevier, vol. 148(2), pages 473-501.
    17. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    18. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 509-540.
    19. 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 302-335, May.
    20. Bester, Helmut & Strausz, Roland, 2007. "Contracting with imperfect commitment and noisy communication," Journal of Economic Theory, Elsevier, vol. 136(1), pages 236-259, September.
    21. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-1175, September.
    22. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-1098, July.
    23. Drew Fudenberg & Jean Tirole, 1983. "Sequential Bargaining with Incomplete Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 221-247.
    24. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
    25. Sönje Reiche, 2006. "Ambivalent Investment and the Hold-Up Problem," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1148-1164, December.
    26. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    27. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    28. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    29. Vasiliki Skreta, 2006. "Sequentially Optimal Mechanisms -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 1085-1111.
    30. Dewatripont, M. & Maskin, E., 1990. "Contract renegotiation in models of asymmetric information," European Economic Review, Elsevier, vol. 34(2-3), pages 311-321, May.
    31. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 57-82.
    32. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
    33. Paul R. Milgrom & Robert J. Weber, 1985. "Distributional Strategies for Games with Incomplete Information," Mathematics of Operations Research, INFORMS, vol. 10(4), pages 619-632, November.
    34. William Fuchs & Andrzej Skrzypacz, 2013. "Bargaining with Deadlines and Private Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 219-243, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gretschko, Vitali & Wambach, Achim, 2017. "Contract Design With Limited Commitment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168269, Verein für Socialpolitik / German Economic Association.
    2. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    3. Gretschko, Vitali & Wambach, Achim, 2017. "Contract (re-)negotiation with private and common values," ZEW Discussion Papers 17-056, ZEW - Leibniz Centre for European Economic Research.
    4. Silva, Francisco, 2019. "Renegotiation proof mechanism design with imperfect type verification," Theoretical Economics, Econometric Society, vol. 14(3), July.
    5. Matteo Foschi, 2016. "Contracting with Type-Dependent Naïveté," Discussion Papers in Economics 16/03, Division of Economics, School of Business, University of Leicester.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Robert Evans & Sonje Reiche, 2013. "Mechanism Design and Non-Cooperative Renegotiation," Cambridge Working Papers in Economics 1331, Faculty of Economics, University of Cambridge.
    2. Skreta, Vasiliki, 2015. "Optimal auction design under non-commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 854-890.
    3. Hannu Vartiainen, 2003. "Auction Design without Commitment," Working Papers 2003.24, Fondazione Eni Enrico Mattei.
    4. Silva, Francisco, 2019. "Renegotiation proof mechanism design with imperfect type verification," Theoretical Economics, Econometric Society, vol. 14(3), July.
    5. Beccuti, Juan & Möller, Marc, 2021. "Screening by mode of trade," Games and Economic Behavior, Elsevier, vol. 129(C), pages 400-420.
    6. Laura Doval & Vasiliki Skreta, 2022. "Mechanism Design With Limited Commitment," Econometrica, Econometric Society, vol. 90(4), pages 1463-1500, July.
    7. Bergemann, Dirk & Pavan, Alessandro, 2015. "Introduction to Symposium on Dynamic Contracts and Mechanism Design," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 679-701.
    8. Neeman, Zvika & Pavlov, Gregory, 2008. "Renegotiation-Proof Mechanism Design," Foerder Institute for Economic Research Working Papers 275717, Tel-Aviv University > Foerder Institute for Economic Research.
    9. Devanur, Nikhil R. & Peres, Yuval & Sivan, Balasubramanian, 2019. "Perfect Bayesian Equilibria in repeated sales," Games and Economic Behavior, Elsevier, vol. 118(C), pages 570-588.
    10. Vasiliki Skreta, 2000. "Sequentially Optimal Mechanisms," Econometric Society World Congress 2000 Contributed Papers 1521, Econometric Society.
    11. Tangerås, Thomas & Gick, Wolfgang, 2021. "Contracting with Endogenously Incomplete Commitment: Escape Clauses," Working Paper Series 1390, Research Institute of Industrial Economics.
    12. Bester, Helmut & Krähmer, Daniel, 2012. "Exit options in incomplete contracts with asymmetric information," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1947-1968.
    13. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, vol. 4(3), pages 1-40, August.
    14. Gerardi, Dino & Maestri, Lucas, 2020. "Dynamic contracting with limited commitment and the ratchet effect," Theoretical Economics, Econometric Society, vol. 15(2), May.
    15. Doval, Laura & Skreta, Vasiliki, 2024. "Optimal mechanism for the sale of a durable good," Theoretical Economics, Econometric Society, vol. 19(2), May.
    16. Maria Goltsman, 2011. "Optimal information transmission in a holdup problem," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 495-526, September.
    17. Watson, Joel & Buzard, Kristy, 2009. "Contract, Renegotiation, and Hold Up: General Results on the Technology of Trade and Investment," University of California at San Diego, Economics Working Paper Series qt3923q7kz, Department of Economics, UC San Diego.
    18. Buzard, Kristy & ,, 2012. "Contract, renegotiation, and hold up: Results on the technology of trade and investment," Theoretical Economics, Econometric Society, vol. 7(2), May.
    19. Joel Watson, 2007. "Contract, Mechanism Design, and Technological Detail," Econometrica, Econometric Society, vol. 75(1), pages 55-81, January.
    20. Pablo Casas-Arce & Thomas Kittsteiner & F. Asís Martínez-Jerez, 2019. "Contracting with Opportunistic Partners: Theory and Application to Technology Development and Innovation," Management Science, INFORMS, vol. 65(2), pages 842-858, February.

    More about this item

    Keywords

    Renegotiation; Mechanism design; Contract; Commitment;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:157:y:2015:i:c:p:1159-1187. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.