Contractual Contingencies and Renegotiation

Mathias Dewatripont and Eric Maskin

RAND Journal of Economics, 1995, vol. 26, issue 4, 704-719

Abstract: In a dynamic model of asymmetric information between the owner of a firm and a manager, we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible. In particular, we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor, thereby limiting the contractible contingencies. Our findings thus provide an endogenous explanation for contract simplicity, in contrast to those based on transactions costs or bounded rationality.

Date: 1995
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