Review of Economic Studies Vol. 55 No. 4 1988
Contract Renegotiation and Coasian Dynamics
Abstract
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.
- DOI
- 10.2307/2297403
- Volume
- 55
- Issue
- 4
- Pages
- 509
- Sources
- crossref bibtex:phds-export.bib openalex