Renegotiation and Optimality in Agency Contracts

Ching-to Ma

The Review of Economic Studies, 1994, vol. 61, issue 1, 109-129

Abstract: We analyse renegotiation in a hidden action principal-agent model. Contract renegotiation offers are made by the agent. A refinement is imposed on the principal's beliefs: if precisely one action is optimal with respect to both the principal's and the agent's contracts, the principal believes that that action has been taken. With the refinement imposed, perfect-Bayesian equilibrium allocations are identical to the second best in the classical principal-agent model without renegotiation. When renegotiation is led by the agent and when equilibria satisfy the refinement, equilibrium allocations are ex ante efficient.

Date: 1994
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Related works:
Working Paper: Renegotiation and Optimality in Agency Contracts (1991)
Working Paper: Renegotiation and Optimality in Agency Contracts (1990)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:61:y:1994:i:1:p:109-129.

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