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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 paper 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.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse26_2005.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse26_2005.

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Length: 28
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:bon:bonedp:bgse26_2005

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Keywords: Contract modification; Renegotiation; Moral hazard;

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References

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Citations

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Cited by:
  1. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
  2. Ofer Grosskopf & Barak Medina, 2007. "Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range," Review of Law & Economics, De Gruyter, vol. 3(2), pages 4.
  3. Schmitz, Patrick W., 2001. "The Hold-Up Problem and Incomplete Contracts: A Survey of Recent Topics in Contract Theory," MPRA Paper 12562, University Library of Munich, Germany.
  4. 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.
  5. 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).

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