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Contract design with limited commitment

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  • Gretschko, Vitali
  • Wambach, Achim

Abstract

We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any mechanism. That is, we allow the principal, after observing the outcome of a mechanism to renegotiate the resulting contract without cost by proposing a new mechanism any number of times. We provide a general characterization of renegotiation-proof states of such a renegotiation. The proposed solution concept provides an effective and easy-to-use tool to analyze contracting problems with limited commitment. We apply the solution concept to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal contracts for the principal are pooling and satisfy a "no-distortionat-the-bottom" property.

Suggested Citation

  • Gretschko, Vitali & Wambach, Achim, 2018. "Contract design with limited commitment," ZEW Discussion Papers 18-054, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:18054
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Principal-Agent models; renegotiation; commitment; Coase-conjecture;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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