Moral Hazard and Renegotiation: Multi-Period Robustness

FTC Bureau of Economics Working Paper No. 259

22 Pages Posted: 2 Jun 2003

See all articles by Abraham L. Wickelgren

Abraham L. Wickelgren

University of Texas at Austin - School of Law; University of Texas at Austin - Center for Law, Business, and Economics

Date Written: April 2003

Abstract

Is the second best outcome of static agency models renegotiation proof? In models with one period of renegotiation, Fudenberg and Tirole (1990) answer no when the principal makes the offer, while Ma (1994) and Matthews (1995) answer yes when the agent makes the offer. This paper analyzes the robustness of these two claims when there are more periods of renegotiation. With a known number of periods, if the principal makes at least one offer, even if the agent makes the offer in every other period, the equilibrium is identical to Fudenberg and Tirole equilibrium. With an uncertain number of periods, the agency problem is even more severe than in the Fudenberg and Tirole model.

Keywords: Moral Hazard, Agency, Renegotiation

JEL Classification: D23, D82

Suggested Citation

Wickelgren, Abraham L., Moral Hazard and Renegotiation: Multi-Period Robustness (April 2003). FTC Bureau of Economics Working Paper No. 259. Available at SSRN: https://ssrn.com/abstract=402400 or http://dx.doi.org/10.2139/ssrn.402400

Abraham L. Wickelgren (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

University of Texas at Austin - Center for Law, Business, and Economics

Austin, TX 78712
United States

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