Simple Contracts, Renegotiation Under Asymmetric Information, and the Hold-Up Problem
Simple Contracts, Renegotiation Under Asymmetric Information, and the Hold-Up Problem

Author: Patrick W. Schmitz

Publisher:

Published: 2004

Total Pages: 0

ISBN-13:

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In this article it is demonstrated that voluntary bargaining over a collective decision under asymmetric information may well lead to ex post efficiency if the default decision is non-trivial. It is argued that the default decision may be interpreted as a simple contract that the parties have written ex ante. This result is used in order to show that simple unconditional contracts which are renegotiated may allow the hold-up problem to be solved, even if the parties' valuations are private information.

Economic Analysis of Contract Law
Economic Analysis of Contract Law

Author: Sugata Bag

Publisher: Springer

Published: 2018-01-24

Total Pages: 215

ISBN-13: 3319652680

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This book examines the main issues arising in economic analysis of contract law with special attention given to the incomplete contracts. It discusses both the main features of contract law as they relate to the problem of economic exchange, and how the relevant legal rules and the institutions can be analysed from an economic perspective. Evaluate the welfare impacts, analyses the effects and the desirability of different breach remedies and examines the optimal incentive structure of party-designed liquidated damages under the different dimensions of informational asymmetry. Overall the book aims to contribute to the legal debate over the adoption of the specific breach remedies when the breach victim’s expectation interest is difficult to assess, and to the debate over courts' reluctance to implement large penalties in the event of breach of contracts.

Design and Renegotiation of Debt Covenants
Design and Renegotiation of Debt Covenants

Author: Nicolae Garleanu

Publisher:

Published: 2005

Total Pages: 36

ISBN-13:

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We analyze the design and renegotiation of covenants in debt contracts as a particular example of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where future firm investments are efficient in some states, but also involve a transfer from the lender(s) to shareholders. While there is symmetric information regarding investment efficiency, managers are better informed about any potential transfer than the lender. The lender can learn this information, but at a cost. In this setting, we show that the simple adverse selection problem leads to the allocation of greater ex-ante decision rights to the uninformed party than would follow under symmetric (in particular, full) information. Consequently, ex-post renegotiation is in turn biased towards the uninformed party giving up these excessive rights. In many settings, this result yields the opposite implication from standard Property Rights results regarding contracting under incomplete contracts and ex-ante investments, whereby rights should be allocated to minimize inefficiencies due to distortions in ex-ante investments. Indeed, for debt contracts as well as other settings, the uninformed party, who receives strong decision rights in our setting, is likely to have few significant ex-ante investments to undertake relative to the informed party.

Renegotiation-proof Contracts with Moral Hazard and Persistent Private Information
Renegotiation-proof Contracts with Moral Hazard and Persistent Private Information

Author: Bruno Strulovici

Publisher:

Published: 2011

Total Pages:

ISBN-13:

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How does renegotiation affect contracts between a principal and an agent subject to persistent private information and moral hazard? This paper introduces a concept of renegotiationproofness, which adapts to stochastic games the concepts of weak renegotiation-proofness and internal consistency by exploiting natural comparisons across states. When the agent has exponential utility and cost of effort, each separating renegotiation-proof contract is characterized by a single "sensitivity" parameter, which determines how the agent's promised utility varies with reported cash flows. The optimal contract among those always causes immiserization. Reducing the agent's cost of effort can harm the principal by increasing the tension between moral hazard and reporting problems. Truthfulness of the constructed contracts is obtained by allowing jumps in cash flow reports and turning the agent's reporting problem into an impulse control problem. This approach shows that self-correcting reports are optimal of the equilibrium path. The paper also discusses the case of partially pooling contracts and of permanent outside options for the agent, illustrating the interaction between cash-flow persistence, renegotiation, moral hazard, and information revelation. -- Repeated Agency ; Asymmetric Information ; Persistent Information ; Contract Theory ; Principal Agent ; Limited Commitment ; Renegotiation ; Recursive Contracts

The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting
The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting

Author: Michael Ryan Roberts

Publisher:

Published: 2014

Total Pages: 43

ISBN-13:

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Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post.