Renegotiation Design with Unverifiable Information

Philippe Aghion, Mathias Dewatripont and Patrick Rey

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper considers a buyer-seller relationship with observable but unverifiable investments and/or random utility parameters. In such situations, it is known that contract renegotiation may prevent the implementation of first-best outcomes. In this paper, we show however that efficient investments and optimal risk-sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process. Specifically, we focus on the following two features of renegotiation design. First, default options in case renegotiation breaks down; second, the allocation of all bargaining power to either contracting party. Moreover, we show that these two features can be obtained in standard Rubinstein bargaining games through contractual provisions, such as specific-performance clauses and penalties for delay (or, equivalently, financial "hostages" refundable without interest).

Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (285)

Published in Econometrica

Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/1237501 ... le%20Information.pdf (application/pdf)

Related works:
Journal Article: Renegotiation Design with Unverifiable Information (1994)
Working Paper: Renegotiation design with unverifiable information (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:12375014

Access Statistics for this paper

More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().