Renegotiating Moral Hazard Contracts Under Limited Liability and Monotonicity

A moral hazard model with renegotiation is studied in which contracts must satisfy two natural restrictions, limited liability and monotonicity of payments. After he has chosen his effort, and before its consequence is realized, a risk averse entrepreneur (agent) may renegotiate his contract with a risk neutral investor (principal). Assuming the agent has the renegotiation bargaining power, a debt contract is the optimal initial contract.

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