Mediated Renegotiation

Résumé

We propose a novel approach to contract renegotiation with asymmetric information, introducing mediated mechanisms that generate additional private information to deter renegotiation. These mechanisms prevent any renegotiation, upholding secondbest optimality as the unique equilibrium outcome. Thus, the inefficiencies typically associated with the threat of renegotiation are completely offset by the design of mediated mechanisms. We formally illustrate this result in the canonical framework of Fudenberg and Tirole (1990). We explicitly show that these mediated mechanisms can be decentralized by smart contracts, running on a public blockchain, which guarantees that our results do not require any trustworthy third party.