Renegotiation and conflict resolution in relational contracting

Rui Zhao

Games and Economic Behavior, 2012, vol. 75, issue 2, 964-983

Abstract: Renegotiation and conflict resolution are studied in relational contracting under subjective evaluation. Renegotiation has three effects. First, it makes the incentive pay scheme low powered: the maximum variation of compensation across performance levels is compressed and the contract is less extreme compared to the case without renegotiation. This effect is stronger when the players are less patient. Second, renegotiation typically renders termination impossible; the contract relies on a “low-morale” mechanism to enforce mutual cooperation. Finally, renegotiation compels the players to resolve their conflicts by selecting a contract that maximizes the lowest possible surplus along the path of the contract.

Keywords: Repeated principal–agent; Self-enforcing contracts; Renegotiation; Private evaluation (search for similar items in EconPapers)
JEL-codes: C73 D82 J30 L14 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:75:y:2012:i:2:p:964-983

DOI: 10.1016/j.geb.2012.02.008

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