Optimality and Renegotiation in Dynamic Contracting

Marco Battaglini ()

No 5014, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation-proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non-linearity of the problem, the optimal equilibrium allocation is unique.

Keywords: contract theory; dynamic contracts; regulation; renegotiation (search for similar items in EconPapers)
JEL-codes: D42 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-reg
Date: 2005-04
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Journal Article: Optimality and renegotiation in dynamic contracting (2007)
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