We frequently observe that contracts do not include all of the contingencies that would seem to be necessary for optimal risk sharing between the parties to the contract. One reason may be that the possibility of renegotiation makes the contract more contingent than it appears. A simple contracting problem is used to show how even a simple contract may achieve optimal risk sharing if new information arrives slowly relatively to the speed of renegotiation.
ASJC Scopus subject areas
- Economics and Econometrics