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Option Contracts and Renegotiation in Complex Environments

Thomas Lyon () and Eric Rasmusen ()

No CIRJE-F-118, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: Hart & Moore (1999) construct a model to show that contracts perform poorly in complex environments when the state of the world is unverifiable and renegotiation cannot be ruled out. They implicitly assume one player can extort payment from another by threatening to take an inefficient action which hurts both of them. We show that without this assumption a simple "buyer option" contract can implement the first-best even as complexity becomes severe.

Pages: 28 pages
Date: 2001-06
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