Double Moral Hazard and Renegotiation

Hiroshi Osano and Mami Kobayashi
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Mami Kobayashi: Graduate School of Ecnomics, Kyoto University

No 563, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We examine renegotiation in a double moral hazard model when both the principal and the agent are allowed to make a renegotiation offer to a self-interested arbitrator at the renegotiation stage even though the principal proposes an initial contract. Under a belief restriction, any perfect-Bayesian equilibrium leads to an allocation that is superior to the second-best allocation of the standard double moral hazard model without renegotiation. The result of this paper gives some reasons for the existence of intermediary organizations such as holding companies, law houses, consulting firms, investment banks or venture capital if it is costly to introduce a third party a la Holmstrom (1982). The result can also provide the rationalization for a fund set up by a group of firms of the industry in which their product is legally required to be recyclable.

Keywords: renegotiation; double moral hazard; intermediary organization. (search for similar items in EconPapers)
JEL-codes: D23 D82 L20 Q20 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2003-01
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Journal Article: Double moral hazard and renegotiation (2005)
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