Moral Hazard and Renegotiation with Multiple Agents
35 Pages Posted: 8 Oct 1998
Date Written: September 12, 1998
The purpose of the paper is to investigate contract renegotiation in multi-agent situations where risk averse agents negotiate a contract offer to the principal after they observed a common, unverifiable perfect signal about their actions. Renegotiation gives the agents gains from mutual insurance. Our main contribution is to show that renegotiation with multiple agents reduces the cost of implementing any implementable action pair down to the first-best level, even though the principal cannot observe the agents' actions. An important implication is that decentralization, in the sense of delegated negotiation and proposals from the agents, can be as effective as centralization that utilizes revelation mechanisms in unrestricted ways.
JEL Classification: D82
Suggested Citation: Suggested Citation