CONTRACT RENEGOTIATION WITH TIME-VARYING VALUATIONS

The paper characterizes optimal renegotiation-proof rental contracts i n a model with adverse selection and hidden information. It generalize s the work of Hart and Tirole 1988 to the case of time-varying valuati ons. The paper considers a durable-goods monopolist who serves a nonan onymous buyer with time-varying valuation for the seller's good. The b uyer's valuation has a persistent and a transient component; both are private information. The paper shows that for some range of prior beli efs the seller strictly prefers leasing to selling.