The CEPR and Portal websites will be unavailable between 12:45GMT and 13:00GMT on Friday, 30th October 2020 due to maintenance.

DP60 | Incomplete Contracts and Renegotiation

Publication Date

01/04/1985

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

When drawing up a contract, it is often impracticable to specify all the possible relevant contingencies, and so contracts are typically incomplete. This paper considers the extent to which these gaps might be filled by building into the contract a mechanism for revising the terms of trade. One striking conclusion of the analysis is that because the parties can rescind the original contract and negotiate a new one, severe limitations are placed on the form the revisions can take. Moreover, these limitations depend crucially on what kind of communication mechanism the parties have at their disposal during revision.