Contract (re-)negotiation with private and common values


Gretschko, Vitali ; Wambach, Achim


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URL: https://ub-madoc.bib.uni-mannheim.de/43751
URN: urn:nbn:de:bsz:180-madoc-437510
Document Type: Working paper
Year of publication: 2017
The title of a journal, publication series: ZEW Discussion Papers
Volume: 17-056
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
School of Law and Economics > VWL, Marktdesign (Gretschko 2017-)
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: C73 , C78 , D82,
Keywords (English): Principal-Agent models , renegotiation , coase-conjecture
Abstract: We analyze the contracting problem of a principal who faces an agent with private information and cannot commit to not renegotiating a chosen contract. We model this by allowing the principal to propose new contracts any number of times after observing the contract choice of the agent. We propose a characterization of renegotiation-proof states of this (re-)negotiation and show that those states are supported by a perfect Bayesian equilibrium of an infinite horizon game. The characterization of renegotiation-proof states provides a tool, which is both powerful and simple to use, for finding such states in specific environments. We proceed by applying the results to adverse selection environments with private and common values. We show that with private values and common values of the ’Spence’ type only, fully efficient and separating states can be renegotiation-proof. With common values of the "Rothschild-Stiglitz" type inefficient and (partial) pooling states may be renegotiation-proof.

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Gretschko, Vitali ; Wambach, Achim (2017) Contract (re-)negotiation with private and common values. Open Access ZEW Discussion Papers Mannheim 17-056 [Working paper]
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