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Contract Renegotiation with Time‐Varying Valuations
Author(s) -
Blume Andreas
Publication year - 1998
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1998.00397.x
Subject(s) - valuation (finance) , renting , private information retrieval , microeconomics , adverse selection , economics , information asymmetry , mathematical economics , business , computer science , finance , computer security , political science , law
The paper characterizes optimal renegotiation‐proof rental contracts in a model with adverse selection and hidden information. It generalizes the work of Hart and Tirole (1988) to the case of time‐varying valuations. The paper considers a durable‐goods monopolist who serves a nonanonymous buyer with time‐varying valuation for the seller's good. The buyer's valuation has a persistent and a transient component; both are private information. The paper shows that for some range of prior beliefs the seller strictly prefers leasing to selling.