Abstract:This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players sign renegotiable contracts with third parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to twostage games. If contracts are observable, then the s… Show more
This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players sign renegotiable contracts with third parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to twostage games. If contracts are observable, then the second mover obtains the best possible payoff given that she plays an incentive compatible and renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then any Bayesian Nash equilibrium outcome of the original game in which the second mover plays an incentive compatible and renegotiationproof strategy can be supported. We apply our results to Stackelberg competition and show that renegotiation-proofness imposes a very simple restriction.JEL Classification: C72, D80, L13.
This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players sign renegotiable contracts with third parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to twostage games. If contracts are observable, then the second mover obtains the best possible payoff given that she plays an incentive compatible and renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then any Bayesian Nash equilibrium outcome of the original game in which the second mover plays an incentive compatible and renegotiationproof strategy can be supported. We apply our results to Stackelberg competition and show that renegotiation-proofness imposes a very simple restriction.JEL Classification: C72, D80, L13.
In a …rm organized into business units, we show when pro…tability increases if procurement is delegated to the division in charge of production. We highlight that our results are driven by the business unit having a di¤erent objective function than Headquarters. The pro…tability of procurement delegation is a¤ected by the essentiality of production facilities to the activities of the …rm, and by strategic distortions in both transfer and input prices. We also look at vertical separation of activities as an alternative to procurement delegation.
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