Complementarity and inefficient renegotiation: an incomplete contract approach

Akitoshi Muramoto ()
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Akitoshi Muramoto: Komazawa University

Economics Bulletin, 2016, vol. 36, issue 2, 721-728

Abstract: In business, wage renegotiations often result in dead weight losses (e.g, a delay in production or labor strikes). We present a model in which one boss and two employees sign a wage contract before knowing what the future revenue will be. Because of the inefficiency of renegotiation, the optimal wage contract minimizes the probability of renegotiation. The boss will prefer to renegotiate when the contracted bonus is high compared to the realized revenue, whereas the employees will when it is relatively low. We show that the probability of renegotiation under the optimal contract and the expected efficiency loss from renegotiation increase as technology becomes more complementary.

Keywords: Wage bargaining; Shapley value; Inefficient renegotiations (search for similar items in EconPapers)
JEL-codes: C7 D2 (search for similar items in EconPapers)
Date: 2016-04-14
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