Simple Contracts, Renegotiation Under Asymmetric Information, and the Hold-Up Problem

Abstract

In this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a "simple" contract that the parties have written ex ante. This result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold-up problem to be solved, even if the parties' valuations are private information.

Keywords: Contract theory, private information, hold-up problem