Contract design and non-cooperative renegotiation

Contract design and non-cooperative renegotiation

We study a contract design setting in which the contracting parties cannot commit not to renegotiate previous contract agreements. In particular, we characterize the outcome functions that are implementable for an uninformed principal and an informed agent if, having observed the agent’s contract choice, the principal can offer a new menu of contracts in its place. An outcome function can be im...

Mechanism Design and Non-Cooperative Renegotiation

We characterize decision rules which are implementable in mechanism design settings when, after the play of a mechanism, the uninformed party can propose a new mechanism to the informed party. The necessary and sufficient conditions are, essentially, that the rule be implementable with commitment, that for each type the decision is at least as high as if there were no mechanism, and that the sl...

Renegotiation and the Dynamics of Contract Design

Besides sunk costs and reputation, long-term contracts are an important form of commitment. In fact, in the imaginary world of Arrow-Debreu there is no room for other forms of commitment than the fully contingent longterm contract. At the risk of oversimplification, one could describe a large part of the theoretical research effort of the past three decades as a systematic attempt at understand...

Contract Renegotiation, Mechanism Design, and the Liquidated Damages Rule

Debt Renegotiation With Incomplete Contract

A debt contract usually does not include a provision about renegotiation. The right to seize the borrower’s asset and the rules of this process are usually stipulated in the contract. Such a promise not to renegotiate is not credible since renegotiation can mitigate the dead-weight loss of liquidating insolvent borrowers. Once the initial contract may not consider the renegotiation procedure an...