Contract, Renegotiation, and Holdup: When Should Messages Be Sent?

29 Pages Posted: 27 Feb 2014 Last revised: 17 Jul 2018

See all articles by Daniel Göller

Daniel Göller

University of Agder - Department of Economics and Finance, School of Business and Law

Date Written: July 2, 2018

Abstract

I consider a canonical bilateral trade setting in which the agents can exert non-verifiable investments, before they play a revelation mechanism and subsequently advance to the trading stage, where they take nondurable actions. Watson (2007) has demonstrated in a similar setting that the set of implementable outcomes is largest (i) when renegotiation can be ruled out, (ii) decreases when renegotiation takes place before the mechanism is played, and (iii) is the smallest when renegotiation takes place after the play of the mechanism. The present paper seeks to clarify the meaning of the second statement. More precisely, I show that the agents can often attain the first best in case (ii), which implies that the fact that the set of implementable outcomes in situation (ii) is smaller compared to situation (i) may not matter much from an efficiency perspective.

Keywords: Incomplete Contracts, Mechanism Design, Holdup, Renegotiation

JEL Classification: D86

Suggested Citation

Göller, Daniel, Contract, Renegotiation, and Holdup: When Should Messages Be Sent? (July 2, 2018). Available at SSRN: https://ssrn.com/abstract=2402110 or http://dx.doi.org/10.2139/ssrn.2402110

Daniel Göller (Contact Author)

University of Agder - Department of Economics and Finance, School of Business and Law ( email )

Serviceboks 422
N-4604 Kristiansand, VEST AGDER 4604
Norway

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