Moral Hazard and Renegotiation with Multiple Agents

We investigate the effects of contract renegotiation in multi-agent situations where risk-averse agents negotiate a contract offer to the principal after the agents observe a common, unverifiable perfect signal about their actions. We show that renegotiation with multiple agents reduces the cost of...

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Bibliographic Details
Published in:The Review of economic studies 2001-01, Vol.68 (1), p.1-20
Main Authors: Ishiguro, Shingo, Itoh, Hideshi
Format: Article
Language:English
Subjects:
Contract incentives
Contract negotiations
Contracts
Economic models
Moral hazard models
Nash equilibrium
Payments
Risk aversion
Sufficient conditions
Wage contracts
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Summary:We investigate the effects of contract renegotiation in multi-agent situations where risk-averse agents negotiate a contract offer to the principal after the agents observe a common, unverifiable perfect signal about their actions. We show that renegotiation with multiple agents reduces the cost of implementing any implementable action profile down to the first-best level, even though the principal cannot observe the agents' actions. Moreover, it is sufficient for the principal to use a “simple” initial contract, in the sense that it consists of no more than a single sharing scheme for each agent and the total payments to the agents are the same regardless of the realised state. An important implication is that decentralization, in the sense of delegated negotiation and proposals from the agents, can be as effective as centralized schemes that utilize revelation mechanisms in unrestricted ways.
ISSN:0034-6527
1467-937X
DOI:10.1111/1467-937X.00157