This paper presents a strategic theory of contract renegotiation. In this theory, suboptimal contracts are put in place initially to protect one party against undesirable a ctions by another party and are renegotiated once the danger is past. The authors develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes, so that only a complicated contract or renegotiation will serve. Unlike most previous accounts of contract renegotiation, this theory does not rely on exogenous uncertainty to motivate renegotiation. Copyright 1988 by American Economic Association.
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