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Observable and Renegotiable Contracts as Commitments to Cooperate

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  • Guido Merzoni

Abstract

We study an example of strategic delegation in Cournot duopoly and show that if contracts are both observable and renegotiable before becoming common knowledge at the outset of the delegated game, the strategic value of contracts is preserved, but the set of equilibria is greatly enlarged. Managerial contracts can be used by owners to co-ordinate on any product market equilibrium allowing them to get a level of profit at least as large as the profit obtainable in the strategic delegation equilibrium without renegotiation, which is used as a threat point. The equilibrium set includes joint profit maximisation.

Suggested Citation

  • Guido Merzoni, 2008. "Observable and Renegotiable Contracts as Commitments to Cooperate," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis0801, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
    • Handle: RePEc:dis:wpaper:dis0801
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    References listed on IDEAS

    as
    1. Mathias Dewatripont, 1988. "Commitment Through Renegotiation-Proof Contracts with Third Parties," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(3), pages 377-390.
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    6. Levent Koçkesen, 2007. "Unobservable Contracts as Precommitments," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(3), pages 539-552, June.
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    More about this item

    Keywords

    Delegation; Observability; Renegotiation; Collusion;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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