Dynamic contracting under adverse selection and renegotiation

Maestri, Lucas

doi:10.1016/j.jet.2017.06.007

Cited by 29 publications

(15 citation statements)

References 12 publications

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“…By contrast, this paper implies that all PBEs become efficient, allowing for arbitrarily large menus of contracts, general utility and cost functions, and an infinite horizon, and focusing on contracts which are constant until renegotiated. 36 31 See Dewatripont (1989), Maskin and Tirole (1992), Battaglini (2007), Maestri (2015), and Strulovici (2011Strulovici ( , 2017. A similar approach has been used to study renegotiation in repeated games with complete information.…”

Section: Related Literaturementioning

confidence: 99%

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

Strulovici¹

2017

Econometrica

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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.

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Section: Related Literaturementioning

confidence: 99%

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

Strulovici¹

2017

Econometrica

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“…This one-shot model of renegotiation is close to the one generally used for mechanism design with complete information (Maskin and Moore [24]), in which, for any inefficient outcome of the mechanism, there is a single renegotiation outcome, which can be predicted by the players. 1 A recent strand of the literature on the Coase Conjecture (see Strulovici [37] and Maestri [23]) is concerned with contract negotiations with limited commitment in which contracts are (re)negotiated using infinite-horizon protocols with frictions. As those frictions vanish the essentially unique equilibrium involves only efficient contracts (see also Beaudry and Poitevin [3] and Goltsman [15]).…”

Section: Literaturementioning

confidence: 99%

Contract design and non-cooperative renegotiation

Evans

Reiche

2015

Journal of Economic Theory

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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 implemented in this setting if and only if it is optimal for the principal for some belief over agent types which is more pessimistic, in the sense of the likelihood ratio order, than the prior. Furthermore, the outcome function cannot be too sensitive to variations in the agent's type. We show that the direct revelation mechanism which implements such a function when renegotiation can be prevented will also implement it in any equilibrium when it cannot, so the standard contract is robust to renegotiation.

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“… Other important contributions in the dynamic contracting literature are Dewatripont (), Hart and Tirole (), Rey and Salanie (), Rustichini and Wolinsky (), Battaglini (), Williams (), Bergemann and Välimäki (), Strulovici (), Garrett and Pavan (), Athey and Segal (), and Maestri (). These papers, however, focus on different aspects of the problem and limit the analysis to environments that are quite different from ours.…”

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confidence: 99%

Optimal dynamic contracting: The first‐order approach and beyond

Battaglini

Lamba

2019

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We explore the conditions under which the "first-order approach" (FO approach) can be used to characterize profit maximizing contracts in dynamic principalagent models. The FO approach works when the resulting FO-optimal contract satisfies a particularly strong form of monotonicity in types, a condition that is satisfied in most of the solved examples studied in the literature. The main result of our paper is to show that except for nongeneric choices of the stochastic process governing the types' evolution, monotonicity and, more generally, incentive compatibility are necessarily violated by the FO-optimal contract if the frequency of interactions is sufficiently high (or, equivalently, if the discount factor, time horizon, and persistence in types are sufficiently large). This suggests that the applicability of the FO approach is problematic in environments in which expected continuation values are important relative to per period payoffs. We also present conditions under which a class of incentive compatible contracts that can be easily characterized is approximately optimal.

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Dynamic contracting under adverse selection and renegotiation

Cited by 29 publications

References 12 publications

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

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

Contract design and non-cooperative renegotiation

Optimal dynamic contracting: The first‐order approach and beyond

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