Contract Negotiation and the Coase Conjecture: A Strategic Foundation for Renegotiation-Proof Contracts ∗

What does contract negotiation look like when some parties hold private information and negotiation frictions are negligible? This paper analyzes this question and provides a foundation for renegotiation-proof contracts in this environment. The model extends the framework of the Coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods. As frictions become negligible, all equilibria converge to a unique outcome which is separating, efficient, and straightforward to characterize. I am grateful for comments from Mehmet Ekmekci, Drew Fudenberg, Lucas Maestri, Jim Malcomson, Paul Milgrom, Alessandro Pavan, Marcin Peski, Ariel Rubinstein, Larry Samuelson, and Asher Wolinsky, discussions by Takuo Sugaya and Alex Wolitzky, as well as the editor and four anonymous referees, Mikhail Safronov’s excellent research assistance, and reactions from seminar participants at Princeton University, Caltech, UCSD, Oxford University, the École Polytechnique Fédérale de Lausanne, the Séminaire Roy in Paris, the University of Illinois at Urbana-Champaign, the London School of Economics, the University of Essex, the University of Pennsylvania, Duke University, the 2013 Cowles Conference in Economic Theory, Kyoto University (KIER), the Stanford Institute for Theoretical Economics (SITE 2013), the Asian Meeting of the Econometric Society (2013), Columbia University, Western University, the University of Toronto, the 2014 Winter Meetings of the Econometric Society, the Toulouse School of Economics, and NYU Stern. This research is supported by an NSF Grant (No.1151410) and a fellowship from the Alfred P. Sloan Foundation.