Delegation with Incomplete and Renegotiable Contracts

Levent Kockesen and Emanuele Gerratana ()

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: It is well known that delegating the play of a game to an agent via incentive contractsmay serveas a commitment device and hence provide a strategic advantage. Previous literature has shown that any Nash equilibrium outcome of an extensive-form principals-only game can be supported as a sequential equilibrium outcome of the induced delegation game when contracts are unobservable and non-renegotiable. In this paper we characterize equilibriumoutcomes of delegation games with unobservable and incomplete contractswith andwithout renegotiation opportunities under the assumption that the principal cannot observe every history in the game when played by her agent. We show that incompleteness of the contracts restricts the set of outcomes to a subset of Nash equilibrium outcomes and renegotiation imposes further constraints. Yet, there is a large class of games in which non-subgame perfect equilibrium outcomes of the principals-only game can be supported even with renegotiable contracts, and hence delegation still has a bite.

Keywords: Strategic Delegation; Incomplete Contracts; Renegotiation. (search for similar items in EconPapers)
JEL-codes: C72 C78 D86 L13 (search for similar items in EconPapers)
Pages: 35 pages.
Date: 2008-04
New Economics Papers: this item is included in nep-bec, nep-cta and nep-gth
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