Renegotiation Design with Unverifiable Information

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Renegotiation Design with Unverifiable Information

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Title: Renegotiation Design with Unverifiable Information
Author: Aghion, Philippe; Dewatripont, Mathias; Rey, Patrick

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Citation: Aghion, Philippe, Mathias Dewatripont, and Patrick Rey. 1994. “Renegotiation Design with Unverifiable Information.” Econometrica 62 (2) (March): 257.
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Abstract: This paper considers a buyer-seller relationship with observable but unverifiable investments and/or random utility parameters. In such situations, it is known that contract renegotiation may prevent the implementation of first-best outcomes. In this paper, we show however that efficient investments and optimal risk-sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process. Specifically, we focus on the following two features of renegotiation design. First, default options in case renegotiation breaks down; second, the allocation of all bargaining power to either contracting party. Moreover, we show that these two features can be obtained in standard Rubinstein bargaining games through contractual provisions, such as specific-performance clauses and penalties for delay (or, equivalently, financial "hostages" refundable without interest).
Published Version: doi:10.2307/2951613
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at
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