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Incomplete Contract and Verifiability

Akira Okada ()
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Akira Okada: Kyoto University

No 982, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: While the theory of incomplete contracts has contributed greatly to our understanding many topics such as the nature and financial struc- ture of the firm, its rigorous foundation has been debated. Maskin and Tirole (1999) show that the usual "observable but not verifiable" as- sumption is not sufficient for the incomplete contract to be optimal, provided that parties can commit themselves not to renegotiate. We show that the assumption is not necessary, either. In sequential bar- gaining where parties can write a contract contingent on (ex post) veri- fiable variables, an equilibrium contract turns out to be a null contract (the ex post Nash bargaining solution). A key to our result is endoge- nous revealing of private information during contract negotiations. The possibility of renegotiations is irrelevant.

Keywords: incomplete contract; ex post Nash bargaining solution; information revealing; sequential bargaining; verifiability (search for similar items in EconPapers)
JEL-codes: C72 C78 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-gth and nep-mic
Date: 2018-01
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