Contract Negotiation and the Coase Conjecture: A Strategic Foundation for Renegotiation-Proof Contracts

Abstract

What does contract negotiation look like when some parties hold private information and negotiation frictions are negligible? This paper analyzes this question and provides a foundation for renegotiation-proof contracts in this environment. The model extends the framework of the Coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods. As frictions become negligible, all equilibria converge to a unique outcome which is separating, efficient, and straightforward to characterize.