In most of the contract theory literature, contracting costs are assumed either to be high enough to preclude certain forms of contracting, or low enough to permit any contract to be written. Similarly, researchers usually treat renegotiation as either costless or prohibitively costly. This paper addresses the middle ground between these extremes, in which the costs of contracting and renegotiation can take intermediate values and the contracting parties can themselves influence these costs. The context for our analysis is the canonical problem of inducing efficient relationspecific investment and efficient ex post trade. Among our principle results are: (i) The efficiency and complexity of the initial contract are decreasing in the cost to create a contract. Hence, the best mechanism design contracts can be too costly to write. (ii) When parties use the simpler contract forms, they require renegotiation to capture ex post surplus and to create efficient investment incentives. In some cases, parties want low renegotiation costs. More interesting is that, in other cases, parties have a strict preference for moderate renegotiation costs. (iii) The effect of Contract Law on contract form is significant but has been overlooked. In particular, the law's interpretive rules raise the cost of enforcing complex contracts, and thus induce parties to use simple contracts. Worse, the law also lowers renegotiation costs, which further undermines complex contracts and is also inappropriate for some of the simpler contracts.

This paper develops a theoretical framework for studying contract and enforcement in settings of complete but unverifiable information and nondurable trading opportunities. The main point of the paper is that the consideration of renegotiation necessitates formal examination of other technological constraints, especially those having to do with the timing and nature of inalienable productive actions. The sets of implementable state-contingent payoffs, under various assumptions about renegotiation opportunities, are characterized and compared. The analysis refutes the validity of the “mechanism design with ex post renegotiation ” program in a wide range of contracting environments and it highlights the need for a more structured game-theoretic framework. JEL Classification: C70, D74, K10. Economic models of contract have yielded important insights regarding the nature and impact of contractual imperfections and optimal contractual form. Many of the insights derive from mechanism-design analysis–a methodology whose elegance relies on stripping away institutional detail and focusing on a few fundamental strategic ingredients. To the extent that institutional constraints plays a critical role in the formation and performance of contracts, however, it is important to develop ways of incorporating these constraints into models. One issue that has received a great deal of attention is the possibility that parties can renegotiate in the midst of a contractual relationship. Hart and Moore’s (1988) seminal article shows how renegotiation following specific investments can inhibit the parties ’ ability to induce optimal investment. To incorporate renegotiation into a

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In most of the contract theory literature, contracting costs are assumed either to be high enough to preclude certain forms of contracting, or low enough to permit any contract to be written. Similarly, researchers usually treat renegotiation as either costless or prohibitively costly. This paper addresses the middle ground between these extremes, in which the costs of contracting and renegotiation can take intermediate values and the contracting parties can themselves influence these costs. The context for our analysis is the canonical problem of inducing efficient relation-specific investment and efficient ex post trade. Among our principle results are: (i) The efficiency and complexity of the initial contract are

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This paper explores how the costs of disclosing evidence affect the attainment of desirable outcomes in contractual relationships with complete information. Not only does evidence production cost influence the players ’ incentives to disclose evidence, it also affects their willingness to participate in a contractual relationship in which they may have to disclose evidence to convey information to a court about the state of the relationship. In some situations, evidence costs can interfere with the attainment of efficient outcomes, but in other situations evidence costs can help with attainment of efficient outcomes. A two-player production game in which investment influences the value of production and the players contract so as to shape investment incentives is used to illustrate these situations.