The Renegotiation-Proofness Principle and Costly Renegotiation

Joel Watson and Jim Brennan

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

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 modelled 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 generally valid. However, we prove a general monotonicity result that confirms the RPP's "renegotiation is bad" message. Our monotonicity theorem establishes that the set of implementable state-contingent payoffs increases with the costs of renegotiation.

Keywords: renegotiation; contracts (search for similar items in EconPapers)
Date: 2002-05-01
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Citations: View citations in EconPapers (7)

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Journal Article: The Renegotiation-Proofness Principle and Costly Renegotiation (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cdl:ucsdec:qt4242n025

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