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Title:Should Contractual Clauses that Forbid Renegotiation Always be Enforced? PDF Logo
Authors:Schmitz, Patrick W.
Issue Date:2005
Series/Report no.:Bonn econ discussion papers 2005,26
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 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.
Subjects:Contract modification
Renegotiation
Moral hazard
JEL:K12
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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