RENEGOTIATION AND OPTIMALITY IN AGENCY CONTRACTS

We analyse renegotiation in a hidden action principal-agent model. Con tract renegotiation offers are made by the agent. A refinement is impo sed on the principal's beliefs: if precisely one action is optimal wit h respect to both the principal's and the agent's contracts, the princ ipal believes that that action has been taken. With the refinement imp osed, perfect-Bayesian equilibrium allocations are identical to the se cond best in the classical principal-agent model without renegotiation . When renegotiation is led by the agent and when equilibria satisfy t he refinement, equilibrium allocations are ex ante efficient.