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Renegotiation and the Form of Efficient Contracts

Green, Jerry and Laffont, Jean-Jacques (1988) Renegotiation and the Form of Efficient Contracts. Social Science Working Paper, 672. California Institute of Technology , Pasadena, CA. (Unpublished)

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Two parties may agree to a mutually binding contract that will govern their behavior after an uncertain event becomes known. As there is no agent who can both observe this uncertain outcome and enforce the contract, contingent agreements are precluded. However, the parties recognize that the uncertain event will be common knowledge for them, and that they will be able to renegotiate the contract voluntarily, provided that they both gain in doing so. When structuring the original contract they can foresee this renegotiation phase. Efficient contracts are those that perform best, when taking this into account. This paper studies the form of such efficient contracts. It is shown that it is always better to have a contract than it is to have none, no matter which party has the preponderence of bargaining strength in the renegotiation phase. We also study whether renegotiation can substitute completely for the absence of contingent contracts. We characterize a family of cases where it can. And we present some "second-best" results in others, where it cannot.

Item Type:Report or Paper (Working Paper)
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Additional Information:This research was supported by National Science Foundation grant number IRI-85-07291. The authors thank Michael Whinston and John Moore for comments on the earlier version. Published as Green, Jerry R., and Jean-Jacques Laffont. "Renegotiation and the form of efficient contracts." Annales d'Economie et de Statistique (1992): 123-150.
Group:Social Science Working Papers
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Series Name:Social Science Working Paper
Issue or Number:672
Record Number:CaltechAUTHORS:20170906-151944637
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81214
Deposited By: Jacquelyn Bussone
Deposited On:08 Sep 2017 20:47
Last Modified:03 Oct 2019 18:40

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