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Journal Article

Contract Renegotiation and Coasian Dynamics

Oliver D. Hart and Jean Tirole
The Review of Economic Studies
Vol. 55, No. 4 (Oct., 1988), pp. 509-540
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297403
Page Count: 32
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Contract Renegotiation and Coasian Dynamics
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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.

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