Double moral hazard and renegotiation |
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Authors: | Hiroshi Osano Mami Kobayashi |
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Institution: | aInstitute of Economic Research, Kyoto University, Yoshida-honmachi, Sakyo-ku, Kyoto 606-8501, Japan;bSchool of Economics, Kinki University, Higashi-Osaka, Osaka 577-8502, Japan |
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Abstract: | We examine renegotiation in a double moral hazard model with an ex ante budget balancing constraint when both the principal and the agent are allowed to make a renegotiation offer even though the principal proposes an initial contract. Under a belief restriction, any perfect-Bayesian equilibrium leads to an allocation that is superior to the second-best allocation of the standard double moral hazard model without renegotiation. The result of this paper gives some reasons for the existence of intermediary organizations such as holding companies, law houses, consulting firms, investment banks or venture capital. The result can also provide the rationalization for a fund set up by a group of firms of the industry in which their product is legally required to be recyclable. |
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Keywords: | Renegotiation Double moral hazard Intermediary organization |
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