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Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

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  • Schmitz, Patrick W.

Abstract

Recent work in the field of mechanism design has led some researchers to propose institutional changes that would permit parties to enter into non-modifiable 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5292.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5292

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Keywords: contract modification; moral hazard; renegotiation;

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References

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Citations

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Cited by:
  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.

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