Contract, Mechanism Design, and Technological Detail

UCSD Economics Discussion Paper No. 2002-04

40 Pages Posted: 30 May 2002

See all articles by Joel Watson

Joel Watson

University of California, San Diego (UCSD) - Department of Economics

Date Written: January 2002

Abstract

This paper develops a theoretical framework for studying contract and enforcement in settings of complete, but unverifiable, information. The main point of the paper is that the consideration of renegotiation necessitates formal examination of other technological constraints, especially those having to do with the timing and nature of inalienable productive decisions. The main technical contributions include (a) results that characterize of the sets of implementable state-contingent payoffs under various assumptions about renegotiation opportunities, and (b) a result establishing conditions under which, when trading opportunities are durable and trade decisions are reversible, stationary contracts are optimal. The analysis refutes the validity of the "mechanism design with ex post renegotiation" program, it demonstrates the validity of other mechanism design models in dynamic environments, and it highlights the need for a more structured game-theoretic framework.

Keywords: implementation, renegotiation, investment, hold-up

JEL Classification: C70, D74, K10

Suggested Citation

Watson, Joel, Contract, Mechanism Design, and Technological Detail (January 2002). UCSD Economics Discussion Paper No. 2002-04, Available at SSRN: https://ssrn.com/abstract=313680 or http://dx.doi.org/10.2139/ssrn.313680

Joel Watson (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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