Mechanism Design with Renegotiation and Costly Messages

According to standard theory, the set of implementable outcome functions is reduced if the mechanism or contract can be renegotiated ex post. In some cases contracts can achieve nothing and so, for example, the holdup problem may be severe. This paper shows that if the mechanism is designed in such a way that sending a message involves a small cost (e.g., the opportunity cost of time spent attending a hearing) then ex post renegotiation essentially does not restrict the set of implementable functions. Any Pareto-efficient, bounded social choice function can be implemented in subgame-perfect equilibrium, for any strictly positive message cost.