Renegotiation Design with Unverifiable Information

Aghion, Philippe; Dewatripont, Mathias; Rey, Patrick

doi:10.2307/2951613

Cited by 488 publications

(327 citation statements)

References 17 publications

Supporting

Mentioning

304

Contrasting

Unclassified

Order By: Relevance

“…Several papers including Aghion, Dewatripont, and Rey (1994), Nöldeke and Schmidt (1995), and Edlin and Reichelstein (1996) show that simple contracts cum renegotiation can be used to implement the first best under fairly general conditions. However, if the renegotiation outcome is inefficient because the parties suffer from loss aversion, first best efficiency cannot be achieved any more.…”

Section: Asset Ownership Long-term Contracts and The Hold-up Problemmentioning

confidence: 99%

Loss Aversion and Inefficient Renegotiation

Herweg

Schmidt

2014

The Review of Economic Studies

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Second, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Third, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate. Terms of use: Documents in EconStor mayJEL classification numbers: C78; D03; D86.

show abstract

Section: Asset Ownership Long-term Contracts and The Hold-up Problemmentioning

confidence: 99%

Loss Aversion and Inefficient Renegotiation

Herweg

Schmidt

2014

The Review of Economic Studies

View full text Add to dashboard Cite

show abstract

“…Additionally, in some cases the ex ante determination of the renegotiation design could solve this investment problem, too. See Aghion et al (1994).…”

Section: Repeated Interactionmentioning

confidence: 99%

The Impact of Electronic Markets on B2B-Relationships

Haller

2004

SSRN Journal

View full text Add to dashboard Cite

Abstract. Although most of the predicted consequences of the internet-revolution in the 90s did not become reality, the internet has lead to sustainable changes in the organization of most industries. In particular, this is true for business-to-business (B2B) relations between firm. An obvious 'proof' for this is the rising number of socalled electronic markets-especially for B2B transactions-since several years. This paper should help to give a better understanding of the organizational impacts of electronic markets in the context of B2B relations. Therefore we use the incomplete contract framework to build a simple model of a repeated game. It will be shown that the existence of an (alternative) electronic market could influence the willingness to cooperate between the up-and the downstream firm in a B2B-relationship. In our special case, the willingness to cooperate by the buyer will decline.

show abstract

“…Given the problem of writing complete contracts prior to making these investments, there may be underinvestment in external sourcing. This has prompted a theoretical debate about the specification of contracts (Grossman and Hart 1986;Hart and Moore 1999), contractual protection (Klein et al 1978), breach of contract (Edlin and Reichelstein 1996), and renegotiation (Hart and Moore 1988;Aghion et al 1994).…”

Section: Problems Setting Up and Managing Contractsmentioning

confidence: 99%

The outsourcing productivity paradox: total outsourcing, organisational innovation, and long run productivity growth

2008

View full text Add to dashboard Cite

A growing number of empirical studies find a relationship between the outsourcing of activities and a long term loss of firm productivity growth. The paper addresses this outsourcing productivity paradox by examining the connection between total outsourcing and organisational innovation. We present a model of organisational innovation in which managers raise productive efficiency by identifying organisational architectures that more effectively integrate value-adding activities and administrative routines. As part of this process, managers can internally or externally source an activity. Simulations of the model show that large scale outsourcing restricts the scope for future organisational innovation, leading to lower productivity growth. The findings accord with the empirical data and provide a salutary warning for managers and policy-makers about the long term implications of total outsourcing.

show abstract

Renegotiation Design with Unverifiable Information

Cited by 488 publications

References 17 publications

Loss Aversion and Inefficient Renegotiation

Loss Aversion and Inefficient Renegotiation

The Impact of Electronic Markets on B2B-Relationships

The outsourcing productivity paradox: total outsourcing, organisational innovation, and long run productivity growth

Contact Info

Product

Resources

About