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Moral hazard and renegotiation of multi-signal contracts

Bijapur, Mohan (2011) Moral hazard and renegotiation of multi-signal contracts. . Social Science Electronic Publishing, Inc., New York, USA.

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Abstract

We study the costs and benefits of additional information in agency contracts, when there is the possibility of renegotiation. The literature to date assumes that contractual simplicity, i.e. the omission of informative contractual contingencies, can only arise in multi-period environments, and only in a specific manner in which it is interim information that is excluded. In contrast, we show that in certain circumstances, it is also efficient to restrict the set of contingencies in a standard one period contract, where all information arrives at once. Although increasing the number of contingencies will always decrease the agency cost, it can have the adverse effect of weakening the principal's commitment not to renegotiate, thus undermining ex ante incentives to exert effort. Applications to several real world phenomena are briefly explored.

Item Type: Monograph (Working Paper)
Official URL: http://www.ssrn.com/en/
Additional Information: © 2011 Social Science Electronic Publishing, Inc.
Divisions: Economics
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
Sets: Departments > Economics
Date Deposited: 01 May 2014 10:58
Last Modified: 09 Jul 2019 23:26
URI: http://eprints.lse.ac.uk/id/eprint/56619

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