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Journal of Law, Economics, and Organization Advance Access originally published online on August 19, 2005
Journal of Law, Economics, and Organization 2005 21(2):315-329; doi:10.1093/jleo/ewi019
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Should Contractual Clauses that Forbid Renegotiation Always be Enforced?

Patrick W. Schmitz

University of Bonn and CEPR

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 article 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.


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