Optimality and renegotiation in dynamic contracting

@article{Battaglini2007OptimalityAR,
  title={Optimality and renegotiation in dynamic contracting},
  author={Marco Battaglini},
  journal={Games and Economic Behavior},
  year={2007},
  volume={60},
  pages={213-246}
}
We characterize the optimal renegotiation-proof contract in a dynamic principal–agent model in which the type of the agent may change stochastically over time. We show that, under general conditions, the optimal contract with commitment is renegotiation proof even when type realizations are serially correlated. When the renegotiation-proofness constraint is binding, it is always optimal to partially screen the types by offering a menu of choices to the agent; and the distortion induced by the… CONTINUE READING

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