Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/221625
Authors: 
Squintani, Francesco
Year of Publication: 
1999
Series/Report no.: 
Discussion Paper No. 1269
Abstract: 
When a principal and an agent operate with simple contracts, at equilibrium, renegotiation will occur after the action is taken. Also, since renegotiation makes incentive contracts non-credible, the principal may prefer non-renegotiable monitoring options. Current literature does not fully reconcile these predictions with the observation of simple non-renegotiated incentive contracts. We model a principal-agent interaction in a social learning framework, and assume that when renegotiation is not observed, players may forget its feasibility, with infinitesimal probability. The unique stable state of our model predicts that the second-best simple incentive contracts occur with non-negligible positive frequency.
Document Type: 
Working Paper

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