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Games 2013, 4(3), 347-366; doi:10.3390/g4030347

The Renegotiation-Proofness Principle and Costly Renegotiation

 and *
Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA92093-0508, USA
* Author to whom correspondence should be addressed.
Received: 7 April 2013 / Revised: 9 June 2013 / Accepted: 9 July 2013 / Published: 25 July 2013
(This article belongs to the Special Issue Contract Theory)
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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.
Keywords: contract theory; bargaining; negotiation; mechanism design contract theory; bargaining; negotiation; mechanism design
This is an open access article distributed under the Creative Commons Attribution License (CC BY) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Brennan, J.R.; Watson, J. The Renegotiation-Proofness Principle and Costly Renegotiation. Games 2013, 4, 347-366.

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