Renegotiation Facilitates Contractual Incompleteness
Posted: 8 Dec 2006
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.
Keywords: Incomplete contracts, theory of the firm
JEL Classification: D23, L22
Suggested Citation: Suggested Citation