Adverse Selection and Renegotiation in Procurement

Abstract

As was shown by Dewatripont, optimal long-tenn contracts are generally not sequentially optimal. The parties ex-post renegotiate them to their mutual advantage. This paper fully characterizes the equilibrium of a simple two-period procurement situation and studies the extent to which renegotiation reduces ex-ante welfare: i) A central re sult is that, like in the non-commitment case, the second period allocation is optimal for the principal conditionally on his posterior beliefs about the agent. ii) The first period allocation exhibits an increasing amount of pooling when the discount factor grows. iii) With a continuum of types, it is never optimal to induce full separation.The paper also analyzes whether renegotiated long-tenn contracts yield outcomes resembling those under either unrenegotiated long-tenn contracts or a sequence of short-tenn contracts and it links the analysis with the multiple unit durable good monopoly problem.

Customer Poaching and Brand Switching

“…We conjecture that the result is Coasian dynamics in the style of Hart-Tirole [1988] and Laffont- Tirole [1990] but we have not verified this due to the complications caused by asymmetric first-period allocations. term contract, the next interval purchase A on a short-term basis in both periods, and those who are closer to indifferent purchase A in period 1 and then switch to B.…”

“…30 We feel that our results provide some insight and intuition, but we also recognize that there is ample room some level of u B * determined by the equilibrium. 30 Hart -Tirole [1988] and Laffont-Tirole [1990] can be interpreted as models where a monopolist offers a menu of long-term and short-term contracts, where the short-term for extensions and refinements of our conclusions, so we will conclude by sketching a few of these. Villas-Boas [1999] extends our model of short-term contracts to an infinitehorizon, overlapping-generations model, in which a firm knows its own past customers but cannot distinguish between new customers and those who purchased from its rival.…”

Are Two a Good Representative for Many?

“…In contrast to the continuous-type papers the discrete papers by Caillaud et al [2], Laffont and Tirole [7,8], Rochet [14], and Stiglitz [16] -all restricting their attention to a binary type-set -reach quite uniform conclusions. They show that, depending on the strength of countervailing incentives, either classical, reversed classical, or first best results are obtained.…”

“…Figure 1 shows that as ∆R 21 increases it passes over 4 different threshold levels, defining 5 regions, each characterized by the constraints that are binding. 6 In [2], [7] and [8], countervailing incentives arise because the agent's reservation utility is type-dependent. In [14], a bi-dimensional type-set leads to countervailing incentives.…”

“…e1 The benchmark levelsx 1 (< x * 1 ) andx 2 (> x * 2 ) are independent of ∆R 21 and as defined in Table I. 8 If ∆R 21 is negative (type decreasing reservation utilitiy), zero (constant reservation utility), or positive but fairly small the higher-type agent has an incentive to pose as the lower-type one in order to signal that his disutility of effort is high so that a high transfer is required to compensate him for production. To counteract this tendency a rent is conceded to type 2.…”