We characterize the outcomes of games when players may make binding o ers of strategy contingent side payments before the game is played. This does not always lead to eÆcient outcomes, despite complete information and costless contracting. The characterizations are illustrated in a series of examples, including voluntary contribution public good games, Cournot and Bertrand oligopoly, principal-...

Default on sovereign debt is a form of political risk. Issuers and creditors have responded to this risk both by strengthening the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and by creating terms that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem i...

We study a setting in which a principal contracts with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and privately observes the sequence of cost realizations. We formulate the principal’s problem as a dynamic program in which the state variable is the agent’s continuation utility, which is naturally interpreted as his equity in the firm. The op...

We explore the role of firms in insuring risk-averse workers. As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are sufficiently risk averse and the firm can base incentive payments on good information. Competition, however, may allow the spot market and explicit contracts to crowd out implicit...

This paper studies optimal relational contracts when the value of the relationship between contracting parties is not commonly known. I consider a principal-agent setting where the principal has persistent private information about her outside option. I show that if the principal has the bargaining power, she wants to understate her outside option to provide strong incentives and then renege on...

Many f inancial c laims specify f ixed maximum payments , varying seniori ty , and absolute priori ty for more senior investors . These features are motivated in a model where a f irm’s manager contracts with several investors and f irm output can only be verif ied privately at a cost . Debtl ike contracts of varying seniori ty generally dominate symmetric contracts, and, when investors are ris...

This article offers a critical assessment of the “survivor bonds” (SBs) proposal recently put forward by Blake and Burrows, which calls for the government to issue bonds whose coupon payments are contingent on the proportions of retirees surviving to particular ages. It suggests that the proposal has considerable merit and discusses the circumstances in which SBs would be useful riskmanagement ...

Cooperation can increase the efficiency of commonly–owned renewable resource use. However, received knowledge is that, absent side payments, cooperative solutions are more difficult to achieve the less homogenous the agents involved. We revisit this claim by analyzing how differences in the opportunity costs of resource harvesting affect the scope for Pareto–improving contracts, where contracti...

We analyze a novel principal-agent problem of moral hazard and adverse selection in continuous time. The constant private shock revealed at time zero when the agent selects the contract has a long-term impact on the optimal contract. The latter is based not only on the continuation value of the agent who truthfully reports, but also contingent upon the continuation value of the agent who misrep...