Contract renegotiation and options in agency problems

Contract renegotiation and options in agency problems This article discusses the ability of an agent and a principal to achieve the first-best outcome when the agent invests in an asset that has greater value if owned by the principal than by the agent. When contracts can be renegotiated, a well-known danger is that the principal can hold up the agent, undermining the agent's investment incentives. We begin by identifying a countervailing effect: Investment by the agent can increase his value for the asset, thus improving his bargaining position in renegotiation. We show that option contracts will achieve the first best whenever his threat-point effect dominates the holdup effect. Otherwise, achieving the first best is difficult and, in many cases, impossible. Oxford University Press « Previous | Next Article » Table of Contents This Article JLEO (2000) 16 (2): 395-423. doi: 10.1093/jleo/16.2.395 » Abstract Free Full Text (PDF) Free Classifications Article Services Article metrics Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Citing articles via Google Scholar Google Scholar Articles by Edin, A. Articles by Hermalin, B. Search for related content Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this? Search this journal: Advanced » Current Issue August 2015 31 (3) Alert me to new issues The Journal About this journal Rights & Permissions Dispatch date of the next issue We are mobile – find out more Journals Career Network Impact Factor: 1.205 5-Yr impact factor: 1.444 Editor-in-Chief Wouter Dessein View full editorial board For Authors Instructions to authors Author self-archiving policy Submit now! Submitting Supplementary Data Alerting Services Email table of contents Email Advanced Access CiteTrack XML RSS feed Corporate Services Advertising sales Reprints Supplements var taxonomies = ("LAW00010", "SOC00450", "SOC00720", "SOC01280"); Most Most Read Hierarchies and Bureaucracies: On the Role of Collusion in Organizations Contract Law and the State of Nature Incentives in Markets, Firms, and Governments The quality of government Juvenile Delinquency and Conformism » View all Most Read articles Most Cited Administrative Procedures as Instruments of Political Control The quality of government Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures » View all Most Cited articles Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department. Online ISSN 1465-7341 - Print ISSN 8756-6222 Copyright © 2015 Oxford University Press Oxford Journals Oxford University Press Site Map Privacy Policy Cookie Policy Legal Notices Frequently Asked Questions Other Oxford University Press sites: Oxford University Press Oxford Journals China Oxford Journals Japan Academic & Professional books Children's & Schools Books Dictionaries & Reference Dictionary of National Biography Digital Reference English Language Teaching Higher Education Textbooks International Education Unit Law Medicine Music Online Products & Publishing Oxford Bibliographies Online Oxford Dictionaries Online Oxford English Dictionary Oxford Language Dictionaries Online Oxford Scholarship Online Reference Rights and Permissions Resources for Retailers & Wholesalers Resources for the Healthcare Industry Very Short Introductions World's Classics function fnc_onDomLoaded() { var query_context = getQueryContext(); PF_initOIUnderbar(query_context,":QS:default","","JRN"); PF_insertOIUnderbar(0); }; if (window.addEventListener) { window.addEventListener('load', fnc_onDomLoaded, false); } else if (window.attachEvent) { window.attachEvent('onload', fnc_onDomLoaded); } var gaJsHost = (("https:" == document.location.protocol) ? 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Contract renegotiation and options in agency problems

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Publisher
Oxford University Press
Copyright
Copyright © 2015 Oxford University Press
ISSN
8756-6222
eISSN
1465-7341
D.O.I.
10.1093/jleo/16.2.395
Publisher site
See Article on Publisher Site

Abstract

This article discusses the ability of an agent and a principal to achieve the first-best outcome when the agent invests in an asset that has greater value if owned by the principal than by the agent. When contracts can be renegotiated, a well-known danger is that the principal can hold up the agent, undermining the agent's investment incentives. We begin by identifying a countervailing effect: Investment by the agent can increase his value for the asset, thus improving his bargaining position in renegotiation. We show that option contracts will achieve the first best whenever his threat-point effect dominates the holdup effect. Otherwise, achieving the first best is difficult and, in many cases, impossible. Oxford University Press « Previous | Next Article » Table of Contents This Article JLEO (2000) 16 (2): 395-423. doi: 10.1093/jleo/16.2.395 » Abstract Free Full Text (PDF) Free Classifications Article Services Article metrics Alert me when cited Alert me if corrected Find similar articles Similar articles in Web of Science Add to my archive Download citation Request Permissions Citing Articles Load citing article information Citing articles via CrossRef Citing articles via Scopus Citing articles via Web of Science Citing articles via Google Scholar Google Scholar Articles by Edin, A. Articles by Hermalin, B. Search for related content Related Content Load related web page information Share Email this article CiteULike Delicious Facebook Google+ Mendeley Twitter What's this? Search this journal: Advanced » Current Issue August 2015 31 (3) Alert me to new issues The Journal About this journal Rights & Permissions Dispatch date of the next issue We are mobile – find out more Journals Career Network Impact Factor: 1.205 5-Yr impact factor: 1.444 Editor-in-Chief Wouter Dessein View full editorial board For Authors Instructions to authors Author self-archiving policy Submit now! Submitting Supplementary Data Alerting Services Email table of contents Email Advanced Access CiteTrack XML RSS feed Corporate Services Advertising sales Reprints Supplements var taxonomies = ("LAW00010", "SOC00450", "SOC00720", "SOC01280"); Most Most Read Hierarchies and Bureaucracies: On the Role of Collusion in Organizations Contract Law and the State of Nature Incentives in Markets, Firms, and Governments The quality of government Juvenile Delinquency and Conformism » View all Most Read articles Most Cited Administrative Procedures as Instruments of Political Control The quality of government Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures » View all Most Cited articles Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department. Online ISSN 1465-7341 - Print ISSN 8756-6222 Copyright © 2015 Oxford University Press Oxford Journals Oxford University Press Site Map Privacy Policy Cookie Policy Legal Notices Frequently Asked Questions Other Oxford University Press sites: Oxford University Press Oxford Journals China Oxford Journals Japan Academic & Professional books Children's & Schools Books Dictionaries & Reference Dictionary of National Biography Digital Reference English Language Teaching Higher Education Textbooks International Education Unit Law Medicine Music Online Products & Publishing Oxford Bibliographies Online Oxford Dictionaries Online Oxford English Dictionary Oxford Language Dictionaries Online Oxford Scholarship Online Reference Rights and Permissions Resources for Retailers & Wholesalers Resources for the Healthcare Industry Very Short Introductions World's Classics function fnc_onDomLoaded() { var query_context = getQueryContext(); PF_initOIUnderbar(query_context,":QS:default","","JRN"); PF_insertOIUnderbar(0); }; if (window.addEventListener) { window.addEventListener('load', fnc_onDomLoaded, false); } else if (window.attachEvent) { window.attachEvent('onload', fnc_onDomLoaded); } var gaJsHost = (("https:" == document.location.protocol) ? "https://ssl." : "http://www."); document.write(unescape("%3Cscript src='" + gaJsHost + "google-analytics.com/ga.js' type='text/javascript'%3E%3C/script%3E")); try { var pageTracker = _gat._getTracker("UA-189672-16"); pageTracker._setDomainName(".oxfordjournals.org"); pageTracker._trackPageview(); } catch(err) {}

Journal

The Journal of Law, Economics, and OrganizationOxford University Press

Published: Oct 1, 2000

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