Self-Revealing Renegotiation'

About this event

We revisit the tension between the legal doctrine of renegotiation and economic efficiency. We introduce self-revealing mechanisms that combine bidirectional communication (the agent sends and receives information) with conditional disclosure (communication remains private during renegotiation but becomes verifiable at contract execution). Within the canonical Fudenberg and Tirole (1990) framework, we design a self-revealing mechanism that fully mitigates the renegotiation threat by uniquely implementing the second-best allocation. Thus, we achieve the full commitment outcome while satisfying renegotiation-proofness. Our optimal mechanism is structurally simple, and exploits signal disclosures to the agent to construct incentive-compatible punishments, which she activates upon observing a renegotiation offer. It satisfies standard commitment assumptions by only conditioning decisions on public information, without requiring any third party enforcement. In practical terms, it can be implemented using existing smart-contract technique. Our results extend to general settings of renegotiation. (JEL D43, D82, D86)