Renegotiation of Sales Contracts

Arbeitspapier

Contracts adopted with later renegotiation in mind may take simple forms. In a principal-agent model, if renegotiation may occur after the agent chooses efforet, the principal protects against unfavorable renegotiation by "selling the project" to the agent via a sales contract. If only singleton (single-scheme) contracts are feasible, the equilibrium initial contract must be a sales contract if the principal's renegotiation position will be inherently inferior in the sense that (a) the agent will have the bargianing power; (b) the principal will not observe the agent's effort, and (c) the agent has the talent, i.e. a rich set of feasible efforts, to exploint contractual nuances. Renegotiation necessarily occurs, and it yields (second-best) efficient allocations. Even when meny (multiple-scheme) contracts are available, if the selection of a scheme from a menu entails any cost, then the final contract is a singleton and equilibrium renegotiation occurs. If there is any complexity cost to specifying a menuy, the initional contract must also be a singleton; it is necessarily a sales contract if the agent has talent. A weak forward induction refinement criterion is used to obtain these results.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 1051

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Theory ; Asymmetric and Private Information; Mechanism Design ; Noncooperative Games
• Subject: contracts ; principal-agent ; moral hazard ; renegotiation ; incentives

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Matthews, Steven A.
• Event: Veröffentlichung
• (who): Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science
• (where): Evanston, IL
• (when): 1993

Further information

• Handle: http://hdl.handle.net/10419/221408
• Last update: 10.03.2025, 11:44 AM CET