Renegotiation of Sales Contracts

Steven A. Matthews ()

No 1051, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: Contracts adopted with later renegotiation in mind may take simple forms. In a principal-agent model, if renegotiation may occur after the agent chooses efforet, the principal protects against unfavorable renegotiation by "selling the project" to the agent via a sales contract. If only singleton (single-scheme) contracts are feasible, the equilibrium initial contract must be a sales contract if the principal's renegotiation position will be inherently inferior in the sense that (a) the agent will have the bargianing power; (b) the principal will not observe the agent's effort, and (c) the agent has the talent, i.e. a rich set of feasible efforts, to exploint contractual nuances. Renegotiation necessarily occurs, and it yields (second-best) efficient allocations. Even when meny (multiple-scheme) contracts are available, if the selection of a scheme from a menu entails any cost, then the final contract is a singleton and equilibrium renegotiation occurs. If there is any complexity cost to specifying a menuy, the initional contract must also be a singleton; it is necessarily a sales contract if the agent has talent. A weak forward induction refinement criterion is used to obtain these results.

Keywords: contracts; principal-agent; moral hazard; renegotiation; incentives (search for similar items in EconPapers)
JEL-codes: D21 D82 C72 (search for similar items in EconPapers)
Date: 1993-06
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Journal Article: Renegotiation of Sales Contracts (1995)
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