Renegotiation Facilitates Contractual Incompleteness

Birger Wernerfelt

Journal of Economics & Management Strategy, 2007, vol. 16, issue 4, 893-910

Abstract: 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 nonprice 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.

Date: 2007
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