Incomplete Information, Renegotiation, and Breach of Contract

Jihong Lee ()
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Jihong Lee: Birkbeck College, University of London

Economics Bulletin, 2005, vol. 3, issue 5, 1-7

Abstract: Once a contract has been agreed by two agents, the problem of renegotiating breach under two-sided asymmetric information on the agents' outside options is equivalent to the problem of bilateral trade with uncertain gains. Thus, the theorem of Myerson and Satterthwaite (1983) implies the impossibility of efficient renegotiation. We also show that, assuming no renegotiation, the optimal breach mechanism in this setting corresponds to the expectation damage rule.

Keywords: Contract; Breach (search for similar items in EconPapers)
JEL-codes: C7 K4 (search for similar items in EconPapers)
Date: 2005-01-22
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Citations: View citations in EconPapers (3)

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