Renegotiation and dynamic inconsistency: Contracting with non-exponential discounting

Doruk Cetemen, Felix Zhiyu Feng, Can Urgun

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

This paper studies a continuous-time, finite-horizon contracting problem with renegotiation and dynamic inconsistency arising from non-exponential discounting. The problem is formulated as a dynamic game played among the agent, the principal and their respective future “selves”, each with their own discount function. We identify the principal optimal renegotiation-proof contract as a Markov perfect equilibrium (MPE) of the game, prove that such an MPE exists, and characterize the optimal contract via an extended Hamilton-Jacobi-Bellman system. We solve the optimal contract in closed-form when discounting is a function of the time-difference only and demonstrate the applicability of the results in several different settings.

Original languageEnglish (US)
Article number105606
JournalJournal of Economic Theory
Volume208
DOIs
StatePublished - Mar 2023

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Continuous-time contracting
  • Dynamic inconsistency
  • Extended HJB system
  • Non-atomic games
  • Renegotiation

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