Issue: Winter 1995
Pages: pp. 704-719
Authors: M. Dewatripont and E. Maskin
Title: Contractual Contingencies and Renegotiation
Abstract: In a dynamic model of asymmetric information between the owner of a firm and a manager, we investigate the optimal set of contingencies on which an incentive contract should depend when renegotiation is possible. In particular, we characterize the circumstances in which the contracting parties find it desirable to deliberately restrict what the owner can monitor, thereby limiting the contractible contingencies. Our findings thus provide an endogenous explanation for contract simplicity, in contrast to those based on transactions costs or bounded rationality.
Asymmetric and Private Information (D820)
Transactional Relationships; Contracts and Reputation (L140)
Theory of Uncertainty and Information (0261)
Managerial Economics (5120)