Renegotiation and the efficiency of investments

In a long-term relationship between two parties, one party's threat of a un ilateral violation of an initial contract may induce a renegotiation of the contract, As a renegotiation may result in one party capturing some of the return from the other's investments, this possibility may lead to underinv estment. I show that if there is uncertainty associated with the outcome of a renegotiation, and if players are risk averse, there will be an interval for the initial contract so that it is not renegotiated. By an appropriate choice of the initial contract underinvestment can thus be avoided.