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Adverse Selection and Renegotiation in Procurement

Laffont, Jean-Jacques and Tirole, Jean (1988) Adverse Selection and Renegotiation in Procurement. Social Science Working Paper, 665. California Institute of Technology , Pasadena, CA. (Unpublished)

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As was shown by Dewatripont, optimal long-term 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 result 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-term contracts yield outcomes resembling those under either unnegotiated long-term contracts or a sequence of short-term contracts and it links the analysis with the multiple unit durable good monopoly problem.

Item Type:Report or Paper (Working Paper)
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Additional Information:Research support from the Pew Charitable Trust and the Center for Energy Policy Research at MIT is gratefully acknowledged. We are grateful to Oliver Hart for his helpful discussions. Published as Laffont, Jean-Jacques, and Jean Tirole. "Adverse selection and renegotiation in procurement." The Review of Economic Studies 57, no. 4 (1990): 597-625.
Group:Social Science Working Papers
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Pew Charitable TrustUNSPECIFIED
Massachusetts Institute of Technology (MIT)UNSPECIFIED
Subject Keywords:Cost efficiency, Capital costs, Adverse selection, Two period model, Contract incentives, Social costs, Production costs, Economic theory, Price discrimination, Economic rent
Series Name:Social Science Working Paper
Issue or Number:665
Record Number:CaltechAUTHORS:20170907-141300917
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81244
Deposited By: Jacquelyn Bussone
Deposited On:08 Sep 2017 20:35
Last Modified:03 Oct 2019 18:40

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