Contract renegotiation and coasian dynamics

Oliver D. Hart, Jean Tirole

    Research output: Contribution to journalArticlepeer-review

    194 Scopus citations

    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.

    Original languageEnglish (US)
    Pages (from-to)509-540
    Number of pages32
    JournalReview of Economic Studies
    Volume55
    Issue number4
    DOIs
    StatePublished - Oct 1988

    ASJC Scopus subject areas

    • Economics and Econometrics

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