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The Renegotiation-Proofness Principle and Costly Renegotiation
Department of Economics, University of California, San Diego, 9500 Gilman Drive, La Jolla, CA92093-0508, USA
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Received: 7 April 2013; in revised form: 9 June 2013 / Accepted: 9 July 2013 / Published: 25 July 2013
Abstract: 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
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Brennan, J.R.; Watson, J. The Renegotiation-Proofness Principle and Costly Renegotiation. Games 2013, 4, 347-366.
Brennan JR, Watson J. The Renegotiation-Proofness Principle and Costly Renegotiation. Games. 2013; 4(3):347-366.
Brennan, James R.; Watson, Joel. 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation." Games 4, no. 3: 347-366.