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Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

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Author Info
Patrick W. Schmitz

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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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Publisher 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
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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 9221
Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Related research
Keywords: Contract modification Renegotiation Moral hazard

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Find related papers by JEL classification:
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ofer Grosskopf & Barak Medina, 2007. "Rationalizing Drennan: On Irrevocable Offers, Bid Shopping and Binding Range," Review of Law & Economics, Berkeley Electronic Press, vol. 3(2), pages 4. [Downloadable!] (restricted)
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