Economics Insights @ CBS

We provide a deterministic example in which parties sign a contract which they anticipate will be subsequently renegotiated. The renegotiation is socially desirable. In the example, the cost of writing and enforcing contracts increases their complexity.

What are feasible paths of debt for a government that borrows either internally or externally? The question is suggested by recent concerns about the international debt crisis and high federal budget deficits in the U.S. In this paper, we analyze the benchmark case in which all market participants have perfect foresight, so that only risk-free lending is done. We study the conditions under which the borrower's opportunities include strategies with positive net present value.

A great deal of research on the empirical behavior of inventories examines some variant of the production smoothing model of finished goods inventories. The overall assessment of this model that exists in the literature is quite negative: there is little evidence that manufacturers hold inventories of finished goods in order to smooth production patterns. This paper examines whether this negative assessment of the model is due to one or both of two features: costs shocks and seasonal fluctuations.

This paper presents a strategic theory of contract renegotiation. In this theory, suboptimal contracts are put in place initially to protect one party against undesirable actions by another party and are renegotiated once the danger is past. We develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes, so that only a complicated contract or renegotiation will serve. Unlike most previous accounts of contract renegotiation, this theory does not rely on exogenous uncertainty to motive renegotiation.