John Zhu | The Wharton School, University of Pennsylvania

I provide a micro-foundation for dynamically incomplete contracts that are renegotiated over time. The micro-foundation is based on showing that such contracts implement the optimal complete contract in a general dynamic financial contracting model provided the players have “preference-for-robustness”. Preference-for-robustness is a class of dynamic max-min preferences defined in a setting where players have a fuzzy idea about events in the future. The paper culminates in an analysis of contracting under asymmetric information: The optimal dynamic contract under preference-for-robustness is shown to be a debt contract featuring state-contingent allocation of control rights and a refinance option.

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School of Economics seminars are the main academic seminar series held on a Friday. These seminars are presented by guest researchers and enable School of Economics academics to network with other academics from around Australia and internationally.


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