Contract, Mechanism Design, and Technological Detail

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