Title: INCENTIVES, EQUALITY AND CONTRACT RENEGOTIATIONS: THEORY AND EVIDENCE IN THE CHINESE BANKING INDUSTRY<sup>*</sup>
Abstract: Renegotiation plays an important role in contract theory, but the empirical study of renegotiation is almost non‐existent in the literature. Using a unique dataset from the Chinese banking industry, we find that the large majority of managerial incentive contracts are renegotiated after performances are realized. We develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them. In the unique equilibrium of the model, incentive contracts are almost always renegotiated ex post . Even though renegotiation is fully anticipated, incentive contracts affect performance. The predictions of the model find strong support from our empirical results.