Contract Renegotiation and Coasian Dynamics.

Abstract

Consider a long-term relationship between a seller and buyer whose valuation (for a durable good) is private. As trade progresses, the valuation will be partially revealed and it may be possible for the parties to commit ex ante not to take advantage of this. The authors analyze this first by supposing that the parties can sign a sequence of short-term contracts; and secondly by supposing that they can sign a long-term contract, but cannot commit not to renegotiate it. They find a close relationship in the second case between the optimal long-term contract and the noncommitment outcome in the standard Coasian durabl e good model. Copyright 1988 by The Review of Economic Studies Limited.