Moral Hazard and Verifiability: The Effects of Renegotiation in Agency

Benjamin E Hermalin and Michael Katz ()

Econometrica, 1991, vol. 59, issue 6, 1735-53

Abstract: The authors examine the effects of renegotiation in an agency relationship. They show how renegotiation affects (1) the set of actions the principal can induce the agent to take and (2) the cost of implementing a given action. The authors show that, when the principal receives an unverifiable signal of the agent's action, renegotiation can improve welfare. This result stands in contrast to earlier findings that renegotiation lowers welfare when the principal receives no signal about the agent's action prior to renegotiation. Copyright 1991 by The Econometric Society.

Date: 1991
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Related works:
Working Paper: Moral Hazard and Verifiability: The Effects of Renegotiation in Agency (1990)
Working Paper: Moral Hazard and Verifiability: The Effects of Renegotiation in Agency (1990)
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