Contract Design with Limited Commitment

48 Pages Posted: 2 Jan 2019 Last revised: 18 Jan 2019

See all articles by Achim Wambach

Achim Wambach

ZEW – Leibniz Centre for European Economic Research

Vitali Gretschko

ZEW – Leibniz Centre for European Economic Research

Date Written: December 1, 2018

Abstract

We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any mechanism. That is, we allow the principal, after observing the outcome of a mechanism to renegotiate the resulting contract without cost by proposing a new mechanism any number of times. We provide a general characterization of renegotiation-proof states of such a renegotiation. The proposed solution concept provides an effective and easy-to-use tool to analyze contracting problems with limited commitment. We apply the solution concept to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal contracts for the principal are pooling and satisfy a “no-distortion-at-the-bottom” property.

Keywords: Principal-Agent models, renegotiation, commitment, Coase-conjecture

JEL Classification: C72, C73, C78, D82

Suggested Citation

Wambach, Achim and Gretschko, Vitali, Contract Design with Limited Commitment (December 1, 2018). ZEW - Centre for European Economic Research Discussion Paper No. 18-054, Available at SSRN: https://ssrn.com/abstract=3309081 or http://dx.doi.org/10.2139/ssrn.3309081

Achim Wambach (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Vitali Gretschko

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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