17.10. BGSE Micro Workshop: Vitali Gretschko

 We consider the problem of a principal who wishes to contract with a privately informed agent and is not able to commit to not renegotiating any mechanism. That is, we allow the principal, after observing the outcome of a mechanism to renegotiate the resulting contract without cost by proposing a new mechanism any number of times.  We propose a  solution concept similar to von Neumann-Morgenstern stable sets and show that it provides an effective and easy-to-use tool to analyze contracting problems with limited commitment. We apply the solution concept to a setting with a continuous type space, private values and non-linear contracts. We find that the optimal contracts for the principal are pooling and satisfy a “no-distortion-at-the-bottom” property.