I owe thanks for very helpful suggestions to Sönje Reiche, Joel Watson, and to various seminar audiences. The comments of three anonymous referees and the editor greatly improved the paper.
Mechanism Design With Renegotiation and Costly Messages
Article first published online: 25 SEP 2012
© 2012 The Econometric Society
Volume 80, Issue 5, pages 2089–2104, September 2012
How to Cite
Evans, R. (2012), Mechanism Design With Renegotiation and Costly Messages. Econometrica, 80: 2089–2104. doi: 10.3982/ECTA8772
- Issue published online: 25 SEP 2012
- Article first published online: 25 SEP 2012
- Manuscript received August, 2009; final revision received November, 2011.
- Implementation with renegotiation;
- incomplete contracts;
- hold-up problem;
- communication costs
According to standard theory, the set of implementable efficient outcome functions is greatly reduced if the mechanism or contract can be renegotiated ex post. In some cases, contracts can achieve nothing and so, for example, the hold-up problem may be severe. This paper shows that if the mechanism is designed in such a way that sending a message involves a small cost, then renegotiation essentially does not restrict the set of efficient implementable functions. Given a weak preference-reversal condition, any Pareto-efficient, bounded social choice function can be implemented in subgame-perfect equilibrium in a renegotiation-proof manner, for any strictly positive message cost. The key point is that messages themselves can act as punishments.