Should Contractual Clauses that Forbid Renegotiation Always Be Enforced?

Posted: 5 Nov 2004

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

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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 article 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.

Keywords: Contract modification, renegotiation, moral hazard

JEL Classification: K12

Suggested Citation

Schmitz, Patrick W., Should Contractual Clauses that Forbid Renegotiation Always Be Enforced?. The Journal of Law, Economics, and Organization, Vol. 21, No. 2, pp. 315-329, 2005. Available at SSRN: https://ssrn.com/abstract=613801

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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