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Economic and Legal Aspects of Costly Recontracting

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  • Alan Schwartz
  • Joel Watson

Abstract

This paper explores how the opportunity to recontract affects investment and trade in contractual relationships when it is assumed that renegotiation is costly. In this world, recontracting retains much of the benefit that has been ascribed to it, including the realization of any surplus that is available ex post. Costly recontracting also mitigates the well-known drawback, that parties who expect to renegotiate sometimes cannot credibly commit to invest efficiently. This is because the attractiveness of renegotiation decreases in recontracting costs. We show that the optimal contracting environment often involves moderate recontracting costs, which balance the beneficial and detrimental effects of renegotiation. Our re

Suggested Citation

  • Alan Schwartz & Joel Watson, 2000. "Economic and Legal Aspects of Costly Recontracting," Yale School of Management Working Papers ysm143, Yale School of Management, revised 01 Jan 2001.
  • Handle: RePEc:ysm:somwrk:ysm143
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    File URL: http://icfpub.som.yale.edu/publications/2404
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    References listed on IDEAS

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    Cited by:

    1. Itzhak Gilboa & David Schmeidler, 2003. "Inductive Inference: An Axiomatic Approach," Econometrica, Econometric Society, vol. 71(1), pages 1-26, January.
    2. 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.
    3. Arturo Bris & Ivo Welch, 2005. "The Optimal Concentration of Creditors," Journal of Finance, American Finance Association, vol. 60(5), pages 2193-2212, October.
    4. Andrew Postlewaite, 2007. "Courts of Law and Unforeseen Contingencies," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 662-684, October.
    5. James R. Brennan & Joel Watson, 2013. "The Renegotiation-Proofness Principle and Costly Renegotiation," Games, MDPI, vol. 4(3), pages 1-20, July.
    6. Ivo Welch, 2002. "Columbus' Egg: The Real Determinant of Capital Structure," NBER Working Papers 8782, National Bureau of Economic Research, Inc.

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