Economic and Legal Aspects of Costly Recontracting

Alan Schwartz and Joel Watson

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper explores how the opportunity to recontract affects investment and trade in contractual relationships when it is assumed that renegotiation is costly. In this world, recontracting retains much of the benefit that has been ascribed to it, including the realization of any surplus that is available ex post. Costly recontracting also mitigates the well-known drawback, that parties who expect to renegotiate sometimes cannot credibly commit to invest efficiently. This is because the attractiveness of renegotiation decreases in recontracting costs. We show that the optimal contracting environment often involves moderate recontracting costs, which balance the beneficial and detrimental effects of renegotiation. Our re

Date: 2000-05-01, Revised 2001-01-01
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Working Paper: Economic and Legal Aspects of Costly Recontracting (2001)
Working Paper: Economic and Legal Aspects of Costly Recontracting (2000)
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