Renegotiation Facilitates Contractual Incompleteness

18 Pages Posted: 5 Nov 2007

See all articles by Birger Wernerfelt

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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Attempts to economize on bargaining costs imply that two parties may write a contract which is incomplete in the sense that each party tacitly cedes some decision rights to the other. If decision makers can be disciplined by the threat of ex post renegotiation of decisions initially delegated to them, contracts may be even more incomplete. In the limit, the parties may leave all non-price decisions out of the contract. By thus arguing that the threat of renegotiation facilitates contractual incompleteness, the paper reverses the direction of causality stressed by the literature.

Suggested Citation

Wernerfelt, Birger, Renegotiation Facilitates Contractual Incompleteness. Journal of Economics & Management Strategy, Vol. 16, Issue 4, pp. 893-910, Winter 2007. Available at SSRN: or

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