Bargaining over Incentive Contracts

Standard contract theory assumes that the principal holds all of the bargaining power. By implementing alternating o¤er and strategic delay, we transform the one-shot contracts design game into the in…nite-horizon contracts bargaining game. The uninformed principal and the informed agent bargain over multiple dimensions. Our paper presents the following new results. When the di¤erence between the agent’s types is su¢ ciently large, the e¢ cient outcome is attained. However, when this di¤erence is not su¢ ciently large, we attain either the "sequential separating equilibrium" or the "simultaneous separating equilibrium" depending on the parameter values. We prove the existence and uniqueness of the equilibrium. Lastly, we claim that the multi-dimensionality of bargaining helps to resolve the multiple equilibria problem of standard bargaining theory. JEL Codes: C72, C78, D82. [email protected]. I thank John Riley, Hugo Hopenhayn, Hongbin Cai and Ichiro Obara for their great advice and support. Conversations with Bill Zame, Vasiliki Skreta, Yili Chien, Jia Luo and Yi Zhang are also very helpful. I also thank participants at UCLA Economic Theory Workshop, IO and Theory Proseminar, SED, WEA, WSSA and Midwest Theory Conferences for helpful comments. However, errors are mine.