Should Contractual Clauses that Forbid Renegotiation Always Be Enforced?

28 Pages Posted: 29 Dec 2005

See all articles by Patrick W. Schmitz

Patrick W. Schmitz

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

Multiple version iconThere are 3 versions of this paper

Date Written: October 2005


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.

Keywords: Contract modification, renegotiation, moral hazard

JEL Classification: K12

Suggested Citation

Schmitz, Patrick W., Should Contractual Clauses that Forbid Renegotiation Always Be Enforced? (October 2005). CEPR Discussion Paper No. 5292. Available at SSRN:

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Cologne, 50923


Centre for Economic Policy Research (CEPR)

United Kingdom

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