 Renegotiation and dynamic inconsistency: Contracting with non-exponential discountingEsat Doruk Cetemen, Felix Zhiyu Feng and Can Urgun Journal of Economic Theory, 2023, vol. 208, issue C Abstract: This paper studies a continuous-time, finite-horizon contracting problem with renegotiation and dynamic inconsistency arising from non-exponential discounting. The problem is formulated as a dynamic game played among the agent, the principal and their respective future “selves”, each with their own discount function. We identify the principal optimal renegotiation-proof contract as a Markov perfect equilibrium (MPE) of the game, prove that such an MPE exists, and characterize the optimal contract via an extended Hamilton-Jacobi-Bellman system. We solve the optimal contract in closed-form when discounting is a function of the time-difference only and demonstrate the applicability of the results in several different settings. Keywords: Continuous-time contracting; Dynamic inconsistency; Renegotiation; Extended HJB system; Non-atomic games (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:208:y:2023:i:c:s0022053123000029 DOI: 10.1016/j.jet.2023.105606 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.