CONTRACT REOPENERS

This article incorporates contract reopeners into the analysis of cont ract duration and compares contracts with a reopener to contracts that cannot be reopened. The model contains relative and nominal shocks. I t is shown that the stated duration of a reopenable contract is shorte ned by uncertainty associated with small shocks but lengthened by unce rtainty associated with large shocks. However, the discounted expected duration decreases with the uncertainty associated with both small an d large shocks. There exists a critical size of a large shock for whic h a reopenable contract and a contract with an immutable duration are equally attractive.