Renegotiation of Sales Contracts

Steven Matthews ()

Econometrica, 1995, vol. 63, issue 3, 567-89

Abstract: This paper studies moral hazard contracts that may be renegotiated after an agent chooses an unobservable effort. Unlike in previous models, a contract contains just one scheme and the agent has the renegotiation bargaining power. All equilibria satisfying a weak forward-induction refinement are shown to be (second-best) efficient. Renegotiation necessarily occurs. If the effort set is rich, the initial contract must be a sales contract 'selling the project' to the agent. Thus, a party (the principal) who has an inherently weak renegotiation position should sometimes insist on a simple initial contract. Copyright 1995 by The Econometric Society.

Date: 1995
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Working Paper: Renegotiation of Sales Contracts (1993)
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