Ve consider the problem of designing a contract between a risk-averse agent and a risk-neutral principal when the agent's action is subject to moral hazard and the principal is free to propose a new contract after the agent has chosen his effort level but before the corresponding outcome is revealed.In this setting any optimal contract is equivalent to one that is "renegotiation-proof." A renegotiation-proof contract that induces the agent to choose high effort levels by promising a higher payment following good outcomes must also induce the agent to choose lower effort levels with sufficiently high probability that the contract would not be renegotiated.We show that for a range of utility functions for the agent, including exponential and logarithmic forms, the cost-minimizing renegotiation-proof contract for a given distribution of efforts is the same as the cost-minimizing contract for that distribution under commitment.Thus, the force of the renegotiation-proof constraint is not to change the way that given distributions are implemented, but rather to change which distributions are feasible.However, if the agent has constant relative risk aversion lower than one, the principal may prefer to give the agent an ex-ante rent in order to relax the renegotiation-proofness constraint, so that the optimal contract may differ from, that under commitment not only in the choice of distribution but also in the way that distribution is implemented.Our theory may shed some light on why compensation of managers and contractors is frequently insensitive to the information obtained after the relationship is terminated, and why executives have considerable discretion to adjust the riskiness of their compensation.1.

This paper studies the set of equilibrium payoffs in repeated games with long- and short-run players and little discounting. Because the short-run players are unconcerned about the future, each equilibrium outcome is constrained to lie on their static reaction (best-response) curves. The natural extension of the folk theorem to games of this sort would simply include this constraint in the definitions of the feasible payoffs and minmax values. In fact, this extension does obtain under the assumption that each player's choice of a mixed strategy for the stage game is publicly observable but, in contrast to standard repeated games, the set of equilibrium payoffs is different if players can observe only their opponents' realized actions.