The Renegotiation-Proofness Principle and Costly Renegotiation

James R. Brennan and Joel Watson
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James R. Brennan: Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA92093-0508, USA

Games, 2013, vol. 4, issue 3, 1-20

Abstract: We study contracting and costly renegotiation in settings of complete, but unverifiable information, using the mechanism-design approach. We show how renegotiation activity is best modeled in the fundamentals of the mechanism-design framework, so that noncontractibility of renegotiation amounts to a constraint on the problem. We formalize and clarify the Renegotiation-Proofness Principle (RPP), which states that any state-contingent payoff vector that is implementable in an environment with renegotiation can also be implemented by a mechanism in which renegotiation does not occur in equilibrium. We observe that the RPP is not valid in some settings. However, we prove a general monotonicity result that confirms the RPP’s message about renegotiation opportunities having negative consequences. Our monotonicity theorem states that, as the costs of renegotiation increase, the set of implementable state-contingent payoffs becomes larger.

Keywords: contract theory; bargaining; negotiation; mechanism design (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The Renegotiation-Proofness Principle and Costly Renegotiation (2002)
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