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Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

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  • Patrick W. Schmitz

Abstract

Recent work in the field of mechanism design has led some researchers to propose institutional changes that would permit parties to enter into nonmodifiable contracts, which is not possible under current contract law. This article demonstrates that it may well be socially desirable not to enforce contractual terms that explicitly prevent renegotiation, even if rational and symmetrically informed parties have deliberately signed such a contract. The impossibility to prevent renegotiation can constrain the principal's abilities to introduce distortions in order to reduce the agent's rent, so that the first-best benchmark solution will more often be attained. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jleo/ewi019
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Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

Volume (Year): 21 (2005)
Issue (Month): 2 (October)
Pages: 315-329

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Handle: RePEc:oup:jleorg:v:21:y:2005:i:2:p:315-329

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Citations

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Cited by:
  1. Kräkel, Matthias & Müller, Daniel, 2013. "Merger Efficiency and Managerial Incentives," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 410, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Matthias Kräkel, 2013. "Authority and Incentives in Organizations," Bonn Econ Discussion Papers bgse03_2013, University of Bonn, Germany.
  3. Schmitz, Patrick W., 2010. "On contractual solutions to hold-up problems with quality uncertainty and unobservable investments," MPRA Paper 23157, University Library of Munich, Germany.
  4. Schmitz, Patrick W, 2001. "The Hold-up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 1-17, January.
  5. Kräkel, Matthias & Müller, Daniel, 2013. "Bad Mergers Revisited: An Incentive Perspective," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79914, Verein für Socialpolitik / German Economic Association.
  6. Grosskopf Ofer & Medina Barak, 2007. "Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range," Review of Law & Economics, De Gruyter, vol. 3(2), pages 321-361, August.
  7. Evelyn Korn & Stephan Meisenzahl, 2009. "Contracting still matters! Or: How to design a letter of intent," MAGKS Papers on Economics 200909, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  8. Schmitz, Patrick W., 2009. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," CEPR Discussion Papers 7584, C.E.P.R. Discussion Papers.

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