Michel Poitevin

Contract Renegotiation: A Simple Framework and Implications for Organization Theory

This paper provides a unifying framework for studying renegotiation of contracts in the presence of asymmetric information. We show that interim renegotiation does not constrain the set of contracts attainable with full commitment, regardless of whether renegotiation offers are made by the informed or the uninformed agent. Ex post renegotiation, however, does constrain the set of attainable contracts. These constraints depend on the identity of the agent making the renegotiation offer. We then show how the theory of contract renegotiation can provide insights for organization theory. Specifically, we show how decentralization of decision making can be an optimal response to the threat of ex post renegotiation. Finally, we show that our framework can be used to analyse the trade-off between internal and external markets. (This abstract was borrowed from another version of this item.)

Strategic financial signalling

We Present a Model of an Entry Game in Which Both Financial and Output Markets Are Characterized by the Presence of Asymmetric Information. We Argue That a Firms Financial Policy May Serve As a Common Signal in Both Markets. a Monopoly Is Threatened by Entry. the Profitability of Entry to the Entrant Critically Depends on the Cost Level of the Incubent. We Suppose That the Entrants Wishes to Enter the Market If and Only If the Incubent Has High Cost. But the Entrant Cannot Observe the Incubents Cost Level Directly, and Is Therefore Uncertain of Whether the Incubent Is a Low Or High Cost Type. All Firms Have to Finance a Fixed Cost of Production At the Beginning of the Period. a Low Cost Incubent Would Like to Credibly Reveal Its Private Information to Financiers to Obtain Financial Prices That Reflect Its Quality. Simultaneously It Would Like to Signal Its Cost to the Entrant to Deter Its Entry. We Suggest That Financial Markets Structure Acts As a Common Signal in Financial Markets Allow the Low Cost Incubent to Use Its Financial Structure to Signal Its Type and Deter Entry.

Competitive Screening in Financial Markets when Borrowers can Recontract

This paper examines how the possibility of recontracting affects the financing of projects when an entrepreneur is privately informed about the distribution of returns. We consider a game where an entrepreneur solicits initial financing for a project from competing uninformed financiers. Once the project is undertaken, but before its returns are realized, the entrepreneur can solicit additional financial contracts from competing financiers. It is assumed that these financiers can observe all previously signed contracts and that the seniority of claims is respected in the case of bankruptcy; however, the entrepreneur is never committed not to sell junior claims to competing financiers. The main results of the paper are that (1) the equilibrium is characterized by separation but nevertheless the modalities of financing depend critically on the markets priors about the projects riskiness, in particular, the amount of collateral posted by the entrepreneur varies with the markets prior perceptions about the project, (2) when the market is optimistic about the project, there exists a unique equilibrium outcome, it is separating, but the standard incentivecompatibility constraints are not binding, (3) even if the market is very pessimistic about a projects chances of success, there always exists an equilibrium in which a good project receives sufficient financing, that is, the market does not collapse due to a Lemons effect, (4) the entrepreneurs inability to commit not to recontract may be considered Pareto improving in certain situations. We discuss how the results of the paper may help explain observed financial flows.

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.

Can EconJobMarket help Canadian universities

We analyze the academic matching market by considering a simple model in which applicants who face an application cost strategically choose portfolios of applications. Universities then play a decentralized offer game in which unaccepted offers result in failure to trade on both sides of the market. We characterize a basic equilibrium to illustrate the sorting role that application costs play. In a numeric example, we illustrate how reduced application costs can result in increased matching frictions.