Journal Article

Moral Hazard and Renegotiation with Multiple Agents

Shingo Ishiguro and Hideshi Itoh

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 68, issue 1, pages 1-20
Published in print January 2001 | ISSN: 0034-6527
Published online January 2001 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00157
Moral Hazard and Renegotiation with Multiple Agents

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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.

Journal Article.  0 words. 

Subjects: Economics

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