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The Commitment Value of Contracts under Dynamic Renegotiation

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  • Paul Beaudry
  • Michel Poitevin

Abstract

We examine why different renegotiation processes can lead to opposite results regarding the commitment value of third-party contracts in the presence of asymmetric information. Our main result is that a contract loses all strategic value if renegotiation is allowed during the production stage rather than only before production begins. This result casts serious doubt on the relevance of previous findings which emphasize how contracts can have commitment value even in the presence of renegotiation. Our analysis can also be used to understand the differences between many of the results in the renegotiation literature.

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  • Paul Beaudry & Michel Poitevin, 1994. "The Commitment Value of Contracts under Dynamic Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 501-517, Winter.
    • Handle: RePEc:rje:randje:v:25:y:1994:i:winter:p:501-517
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    Cited by:

    1. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 816-852.
    2. M. Martin Boyer, 2004. "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of Ex Post Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 559-582, December.
    3. Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-343, September.
    4. Faure-Grimaud, Antoine, 2000. "Product market competition and optimal debt contracts: The limited liability effect revisited," European Economic Review, Elsevier, vol. 44(10), pages 1823-1840, December.

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