Contracts , Information Persistence , and Renegotiation ∗

This paper studies how renegotiation and information persistence shape long-term contracts in principal-agent relationships. Truthful contracts that are renegotiation-proof, according to a concept tailored to account for persistence in the agent’s type, are characterized by their sensitivity to the reports of the agent. The sensitivity of the optimal renegotiation-proof contract is increasing in information persistence and in the discount rate of the agent, and causes immiserization. Renegotiation-proof contracts are self-correcting off the equilibrium path. These results still hold when the agent is also subject to moral hazard. In that case, a lower cost of effort of the agent can reduce the payoff of the principal by increasing the severity of the agency problem.