Contract Renegotiation and Organizational Design

Michel Poitevin

No 1135, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper studies the implications of non-commitment for organizational design. An organizational form must trade-off between the coordination benefits associated with the centralization of information and its associated costs in terms of renegotiation. The analysis makes precise what these benefits and costs are. First, I characterize renegotiation-proof allocations for organizational forms that differ in the amount of decentralization that they support. Second, I compare these different organizational forms. The analysis shown that (1) complete decentralization of decision-making is always weakly dominated by a more centralized structures when information is dispersed in the organization; (2) the player with the most important or relevant information should be the decision-maker.

Date: 1995-07
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Working Paper: Contract Renegotiation and Organizational Design (1995)
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