Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/98546 
Year of Publication: 
2013
Citation: 
[Journal:] Games [ISSN:] 2073-4336 [Volume:] 4 [Issue:] 3 [Publisher:] MDPI [Place:] Basel [Year:] 2013 [Pages:] 347-366
Publisher: 
MDPI, Basel
Abstract: 
We study contracting and costly renegotiation in settings of complete, but unverifiable information, using the mechanism-design approach. We show how renegotiation activity is best modeled in the fundamentals of the mechanism-design framework, so that noncontractibility of renegotiation amounts to a constraint on the problem. We formalize and clarify the Renegotiation-Proofness Principle (RPP), which states that any state-contingent payoff vector that is implementable in an environment with renegotiation can also be implemented by a mechanism in which renegotiation does not occur in equilibrium. We observe that the RPP is not valid in some settings. However, we prove a general monotonicity result that confirms the RPP's message about renegotiation opportunities having negative consequences. Our monotonicity theorem states that, as the costs of renegotiation increase, the set of implementable state-contingent payoffs becomes larger.
Subjects: 
contract theory
bargaining
negotiation
mechanism design
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
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