Risk distribution and bonding mechanisms in industrial marketing

This paper models the interactive process of planning, negotiating, selling, and putting into operation a highly complex technical object as a “precarious partnership.” The process consists of several steps or phases. Typically, the participants in such a process are in different relative positions of strength and especially information. For the weaker side, these differences usually bring about the danger of being exploited by the other side. If the interactive process consisted of isolated phases only, this danger could prevent the interaction. However, in the course of the entire process, the relative positions are repeatedly switched. This fact influences incentives, behavior, and expectations of both sides, which in return reduces the potential confilict over time, strengthens the mutual commitment, and limits the risks of cooperation to the extent that cooperation becomes possible and reasonable. Many procedural and institutional characteristics of the marketing of complex technical objects fit into this interpretation. The method of analysis used in this article could help to narrow the gap between marketing science and the economic analysis of market processes.     

On the welfare effects of allowing unlimited renegotiation in agency relationships

We study renegotiation in an agency setting where the number of offers and accept/reject decisions parties can make is potentially unlimited. Thus any contract, either on or off the equilibrium path, may be subject to possible renegotiation. We first show that the principal will not be able to gain complete access to the agent’s private information with unlimited renegotiation, unlike when the potential number of renegotiations is finite. Rather the agent either employ a randomized reporting strategy or do not to report at all. We then identify conditions under which expected allocations are most efficient with the contract that induces no agent communication. More significantly, by doing so we also identify conditions under which the parties are made strictly worse off by committing to end renegotiation after a fixed number of rounds. We thank workshop participants at University of California, Irvine, University of Chicago, Duke University, Hong Kong University of Science and Technology, University of Houston, London School of Economics, University of Minnesota, Ohio State University, the Carnegie Mellon Accounting Research Conference, the editor, and an anonymous referee for their helpful comments and suggestions.