Renegotiation of Dynamically Incomplete Contracts
نویسنده
چکیده
I provide a micro-foundation for dynamically incomplete contracts that are renegotiated over time. The micro-foundation is based on showing that such contracts implement the optimal complete contract in a general dynamic model provided the players have “preference-for-robustness.” Preference-for-robustness is a way of modeling players perpetually having a fuzzy idea as time passes about events in the distant future. As an application, I introduce asymmetric information and show that under preferencefor-robustness, the optimal dynamic contract is debt. The debt contract is not just a static, wedge payoff function, but, rather, includes a state-contingent allocation of control rights and a refinance option. JEL Codes: D86, G32, G33
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