The Commitment Value of Contracts under Dynamic Renegotiation

We examine why different renegotiation processes can lead to opposite results regarding the commitment value of third-party contracts in the presence of asymmetric information. Our main result is that a contract loses all strategic value if renegotiation is allowed during the production stage rather than only before production begins. This result casts serious doubt on the relevance of previous findings which emphasize how contracts can have commitment value even in the presence of renegotiation. Our analysis can also be used to understand the differences between many of the results in the renegotiation literature.