Consider a long-term relationship between a seller and a buyer whose valuation (for a per-period service or a durable good) is private. As trade progresses, the valuation will be partially revealed, and it may be impossible for the parties to commit ex-ante not to take advantage of this. We analyse this situation first by supposing that the parties can sign a sequence of short-term contracts; and secondly by supposing that they can sign a long-term contract, but cannot commit not to renegotiate it later. We find a close relationship in the second case between the optimal long-term contract and the non-commitment outcome in the standard Coasian durable good model. Our results also have implications for hidden-information principal-agent models.

Oliver D. Hart, Dwight M. Jaffee; On the Application of Portfolio Theory to Depository Financial Intermediaries12, The Review of Economic Studies, Volume 4

This paper analyzes the optimality of the one share-one vote rule. We focus on takeover bids as a mechanism for allocating control. We assume two types of control benefits — benefits to security holders and private benefits to the controlling party. One share-one vote maximizes the importance of benefits to securityholders relative to benefits to the controlling party and hence encourages the selection of an efficient management team. However, one share-one vote does not always maximize the reward to securityholders in a corporate control contest. Sufficient conditions are given for one share-one vote to be optimal overall. The paper also includes a discussion of the empirical evidence.

Most analyses of the principal-agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent's utility being at a stationary point.An important paper of Mirrlees has shown that this approach is generally invalid.We present an alternative procedure.If the agent's preferences over income lotteries are independent of action, we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem.We use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.'Support from the U.K.

[In an economy with incomplete markets, firms' profits at different dates and contingencies cannot be aggregated into a single index and so profit maximization is not well-defined. In this paper we propose an objective for firms to pursue which is a generalization of the idea of profit maximization. We show that, if firms' managers can transfer current income between shareholders at the first date, and if shareholders have what we call competitive perceptions concerning the effect of a change in production plan on share prices, then each firm will maximize a weighted sum of shareholders' private valuations of the firm's production plan, where the weights are the initial shareholdings. We then define, and prove the existence of, a competitive equilibrium in which firms pursue this proposed objective. Finally, we analyze the optimality properties of the competitive equilibrium.]

A general equilibrium model of optimal employment contracts is developed where firms have better information about labor's marginal product than workers. It is optimal for the wage to be tied to the level of employment, to prevent the firm from falsely stating that the marginal product is low and cutting the wage. It is shown that an observed aggregate shock that leads to an interindustry shift in labor demand and that would have no effect on total employment under symmetric information leads to a reduction in employment when firms and workers have asymmetric information.

Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.