Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

Patrick Schmitz

No 5292, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: K12 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-law
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Should Contractual Clauses that Forbid Renegotiation Always be Enforced? (2005)
Working Paper: Should Contractual Clauses that Forbid Renegotiation Always be Enforced? (2005)
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