DP2189 | Renegotiation Before Contract Execution

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26/07/1999

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Abstract

By offering or choosing a contract the informed agent might reveal information to the principal which could be used for immediate renegotiation. This is discussed in an axiomatic approach. We show that if, given the revealed information, there exists a contract which is preferred by everyone, the former contract could not have been renegotiation proof. For private values and common values of the ?Spence' type, a generalized Coase conjecture holds: The principal cannot raise her profit by offering inefficient contracts to the agent. Only for common values of the ?Rothschild-Stiglitz' type, inefficient, but pooling, contracts are possible.