Contract design with limited commitment

Vitali Gretschko and Achim Wambach

No 18-054, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any mechanism. That is, we allow the principal, after observing the outcome of a mechanism to renegotiate the resulting contract without cost by proposing a new mechanism any number of times. We provide a general characterization of renegotiation-proof states of such a renegotiation. The proposed solution concept provides an effective and easy-to-use tool to analyze contracting problems with limited commitment. We apply the solution concept to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal contracts for the principal are pooling and satisfy a "no-distortionat-the-bottom" property.

Keywords: Principal-Agent models; renegotiation; commitment; Coase-conjecture (search for similar items in EconPapers)
JEL-codes: C72 C73 C78 D82 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-des, nep-hrm and nep-mic
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https://www.econstor.eu/bitstream/10419/190569/1/1043604227.pdf (application/pdf)

Related works:
Working Paper: CONTRACT DESIGN WITH LIMITED COMMITMENT (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:18054

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