Non Verifiability, Costly Renegotiation and Efficiency
We study the implications of the non verifiability of information for the allocation of resources and the bearing of risk in a two party relationship. We consider a two step approach. In step one the two parties define a non contingent contract which will be executed when the non verifiable information will become common knowledge of the two parties. In step two a costly exogenous bargaining process takes place. The main result is that with risk neutrality it is possible to induce the first best as a Nash equilibrium of the contract without having to renegotiate. A counter-example shows that the result does not extend to risk averse parties for which non verifiability of information will impede in general risk sharing.
Year of publication: |
1994
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Authors: | GREEN, Jerry R. ; LAFFONT, Jean-Jacques |
Published in: |
Annales d'Economie et de Statistique. - École Nationale de la Statistique et de l'Admnistration Économique (ENSAE). - 1994, 36, p. 81-95
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Publisher: |
École Nationale de la Statistique et de l'Admnistration Économique (ENSAE) |
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