Essays on optimal contracts and renegotiation [Elektronische Ressource] / vorgelegt von Susanne Ohlendorf

Susanne Ohlendorf

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• Publié par: rheinische_friedrich-wilhelms-universitat_bonn
• Publié le: 01 janvier 2009
• Nombre de lectures: 7
• Langue: English

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Essays on Optimal Contracts and
Renegotiation.
Inaugural-Dissertation
zur Erlangung des Grades eines Doktors
der Wirtschafts- und Gesellschaftswissenschaften
durch die
Rechts- und Staatswissenschaftliche Fakulta¨t
der Rheinischen Friedrich-Wilhelms-Universita¨t Bonn
vorgelegt von
Susanne Ohlendorf
aus Bonn.
Bonn 2009Dekan: Prof. Dr. Christian Hillgruber
Erstreferent: Prof. Dr. Urs Schweizer
Zweitreferent: Prof. Paul Heidhues, PhD
Tag der mundl¨ ichen Pruf¨ ung: 20.7.2009
Diese Dissertation ist auf dem Hochschulschriftenserver der ULB Bonn
(http://hss.ulb.uni-bonn.de/diss online) elektronisch publiziert.Abstract
Contract theory studies the incentives and contractual outcomes in eco-
nomic interactions, and how they are influenced by given institutions and
information structures. On an abstract level, a contractual relationship is
characterized by the costs and obstacles that have to be faced in order to
carry out the desired economic transaction. Such transaction costs include
for example search and information cost, bargaining and contracting costs,
and enforcement costs. Depending on the type of transaction costs, optimal
contracts will take one form or another. To try to understand economic inter-
actions at this level of detail is of course an enormous undertaking, to which
this thesis makes a small contribution, focusing on the effect of renegotiation
on the form of contracts.
In the first chapter, we consider a repeated moral hazard problem, where
both the principal and the wealth-constrained agent are risk-neutral. In each
of two periods, the principal can make an investment and the agent can exert
unobservable effort, leading to success or failure. Incentives in the second
period act as carrot and stick for the first period, so that effort is higher
after a success than after a failure. If renegotiation cannot be prevented, the
principal may prefer a project with lower returns; i.e., a project may be “too
good” to be financed or, similarly, an agent can be “overqualified.”
The second chapter examines the efficiency of expectation damages as a
breachremedyinabilateraltradesettingwithrenegotiationandrelationship-
specificinvestmentbythebuyerandtheseller.AsdemonstratedbyEdlinand
Reichelstein(1996),nocontractthatspecifiesonlyafixedquantityandafixed
per-unit price can induce efficient investment if marginal cost is constant and
deterministic.Weshowthatthisresultdoesnotextendtomoregeneralpayoff
functions. If both parties face the risk of breaching, the first best becomes
attainable with a simple price-quantity contract.
In the third chapter, we consider the case of an upstream seller who works
to improve an asset that has been specialized to a downstream buyer’s needs.
There is no contract; instead the buyer afterwards makes a take it or leave it
offer to the seller. We assume that the seller has private information about
the fraction of the surplus that he can realize on his own, and show that this
leads to higher investment compared to the complete information case. While
a seller with a large default payoff has always strong incentives to invest, now
also a seller with a low outside option can choose a large investment, trying to
convey the impression of having profitable alternatives. This positive effect on
investment is traded off against the occurence of inefficient separation, whichVI
results when the buyer mistakenly tries to call the seller’s bluff with a low
offer.
Theforthchapterstudiesinfinitelyrepeatedtwoplayergameswithperfect
information and side payments. Each period consists of two stages, one in
which the parties simultaneously choose an action and one in which they
make a monetary transfer. We show that in order to find subgame perfect
or renegotiation-proof payoffs for a given discount factor one can restrict the
analysis to a class of simple stationary strategies, which we call stationary
contracts. We provide simple conditions that characterize renegotiation-proof
stationary contracts, and apply these to a series of examples. In particular,
we show that in a principal-agent game, in which only the agent chooses an
action, all Pareto efficient outcomes can be made renegotiation-proof.Acknowledgements
I am very thankful for the excellent teachers and research conditions that I
have found here at the Bonn Graduate School of Economics. In particular,
my gratitude goes to my supervisor Urs Schweizer who expertly guided my
research and inspired me with his enthusiasm for law and economics. Thanks
also to Paul Heidhues for acting as a referee on my thesis committee and for
many helpful comments. I gratefully acknowledge financial support from the
German Science Foundation through SFB TR 15 and the BGSE.
Thisthesisisbasedonfourpapersthathavebeenpresentedatconferences,
workshops and summer schools. They have greatly improved in the process of
receiving comments from participants, colleagues and referees. An article that
is based on Chapter 3 of this dissertation has been published in advance in
the American Economic Review (Ohlendorf 2009). Chapters 2 and 4 originate
from joint work with Patrick Schmitz, whom I would like to thank for sharing
his knowledge and experience with me. It has been a pleasure to collaborate
with him, as well as with my colleague Sebastian Kranz, whose creativity
makes it always fun to discuss economic questions. Chapter 5 is based on a
joint project that resulted from some of these discussions.
I also want to thank all my colleagues and former collegues of the third
floor for advice and many discussions at tea or coffee breaks. I would also like
to take this opportunity to mention Switgard Feuerstein for her role in my
decision to do a PhD in Economics. Without her encouragement this thesis
would certainly not exist. The second reason that convinced me to start this
endeavor was the open and friendly atmosphere that welcomed me at the
graduate school. The friendship I found continued to be a stabilizing factor
in the years that I have spent here.
I am grateful to my parents who support me in everything I do, and to my
sisters and friends, who provide the important balance to my work. Finally,VIII Acknowledgements
I would like to thank Bastian Goldluc¨ ke, for proofreading pages that have
nothing to do with his field of research, and for everything else.Contents
1 Introduction............................................... 1
1.1 Preliminaries............................................ 1
1.2 Optimal renegotiation-proof contracts with dynamic investment 5
1.3 Simple efficient contracts and contract law.................. 6
1.4 Incomplete contracts and asymmetric information about
asset specificity ......................................... 8
1.5 Renegotiationproof relational contracts..................... 9
2 Repeated moral hazard, limited liability, and renegotiation 11
2.1 Introduction ............................................ 11
2.2 The model.............................................. 14
2.3 Commitment: The “hot hand” effect ....................... 17
2.4 Renegotiation: The “overqualification” effect ................ 19
2.5 Conclusion ............................................. 22
2.6 Proofs ................................................. 24
3 Expectation damages, divisible contracts, and bilateral
investment................................................. 29
3.1 Introduction ............................................ 29
3.2 The model.............................................. 31
3.3 Breach decisions......................................... 32
3.4 Optimal contracts ....................................... 36
3.5 Price adjustment clauses ................................. 39
3.6 Concluding remarks ..................................... 42
3.7 Proofs ................................................. 43
3.8 Examples............................................... 48X Contents
4 Signaling an outside option ................................ 51
4.1 Introduction ............................................ 51
4.2 The outside option signaling game ......................... 54
4.3 Finite type space ........................................ 56
4.4 Continuous type space.................................... 63
4.5 The case with commitment ............................... 66
4.6 Conclusion ............................................. 69
4.7 Proofs ................................................. 71
5 Renegotiation-proof relational contracts with side payments 75
5.1 Introduction ............................................ 75
5.2 The game .............................................. 78
5.3 Stationary contracts and subgame perfection................ 80
5.4 Renegotiation-proofness: Strong perfection.................. 86
5.5 Renegotiation proofness: WRP and SRP ................... 91
5.6 Concluding remarks ..................................... 98
5.7 Proofs .................................................100
References.....................................................1071
Introduction
1.1 Preliminaries
Many exchanges of goods or services are far more complex than ideal mar-
ket transactions. Apart from frictions like search and coordination costs or
contract writing costs, possible obstacles are that actions of others cannot
easily be monitored and controlled, that information may be asymmetr