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Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

  • Patrick W. Schmitz

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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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
Contact details of provider: 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

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