Observable and Renegotiable Contracts as Commitments to Cooperate

Guido Merzoni ()

No dis0801, DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo from Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS)

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.

Keywords: Delegation; Observability; Renegotiation; Collusion (search for similar items in EconPapers)
JEL-codes: C72 D21 L2 (search for similar items in EconPapers)
Date: 2008
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