Contract Negotiation and the Coase Conjecture∗

This paper analyzes an explicit protocol of contract negotiation between a principal who has all the bargaining power and an agent with a privately known type, and provides a foundation for renegotiation-proof contracts in such environments. The model extends the framework of the Coase conjecture to situations in which the seller and buyer must determine the quantity or the quality of the good being sold. All equilibria converge to the same outcomes as renegotiation frictions become negligible. Those contracts are separating, efficient, and easily characterized.