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Renegotiation Facilitates Contractual Incompleteness

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  • Birger Wernerfelt

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.

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  • Birger Wernerfelt, 2007. "Renegotiation Facilitates Contractual Incompleteness," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(4), pages 893-910, December.
    • Handle: RePEc:bla:jemstr:v:16:y:2007:i:4:p:893-910
    DOI: 10.1111/j.1530-9134.2007.00161.x
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    References listed on IDEAS

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    3. Ricard Gil & Jordi Mondria, 2011. "Introducing managerial attention allocation in incentive contracts," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 2(3), pages 335-358, September.

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