Implementing the First Best in an Agency Relationship with Renegotiation: A Corrigendum

Aaron S. Edlin, UC Berkeley
Benjamin Hermalin, UC Berkeley

Abstract

The proof in Proposition 4 in Hermalin and Katz (1991) is incorrect because it fails to check post-renegotiation utilities against the incentive compatibility constraints. This note states and proves a comparable proposition with a slightly stronger assumption regarding the monotonicity of bargaining. This result vindicates the central intuition of Hermalin and Katz about the potential insignificance of the observable, but unverifiable distinction in contracting.