The paper analyzes incomplete contracts and renegotiation in economic transactions. It explores how parties can design contracts that allow for future revisions or renegotiations when the exact terms of a contract cannot be fully specified due to transaction costs. The authors consider two scenarios: one where messages cannot be verified by outsiders (Case A) and another where messages can be verified (Case B). In Case A, the parties have limited ability to revise the contract, and the optimal contract is determined by the initial prices set at date 0. The contract specifies prices that depend on the realized values of v (buyer's valuation) and c (seller's cost). The paper shows that the optimal contract in this scenario is determined by the initial prices and the possible outcomes based on the values of v and c. The results indicate that the optimal contract is sensitive to whether messages can be verified. In Case B, where messages can be verified, the parties have more flexibility in designing the contract. The paper shows that the optimal contract can be more complex and allows for more precise pricing based on the messages exchanged. The results indicate that the optimal contract in this scenario is more flexible and can better account for the uncertainty in v and c. The paper also discusses the implications of these findings for the form of the optimal second-best contract. It shows that when parties are risk-averse or take actions that affect the surplus, the optimal contract must account for these factors. The paper concludes that the ability to verify messages significantly affects the design of the optimal contract, and that the optimal contract in Case B is more flexible and better suited to handle uncertainty.The paper analyzes incomplete contracts and renegotiation in economic transactions. It explores how parties can design contracts that allow for future revisions or renegotiations when the exact terms of a contract cannot be fully specified due to transaction costs. The authors consider two scenarios: one where messages cannot be verified by outsiders (Case A) and another where messages can be verified (Case B). In Case A, the parties have limited ability to revise the contract, and the optimal contract is determined by the initial prices set at date 0. The contract specifies prices that depend on the realized values of v (buyer's valuation) and c (seller's cost). The paper shows that the optimal contract in this scenario is determined by the initial prices and the possible outcomes based on the values of v and c. The results indicate that the optimal contract is sensitive to whether messages can be verified. In Case B, where messages can be verified, the parties have more flexibility in designing the contract. The paper shows that the optimal contract can be more complex and allows for more precise pricing based on the messages exchanged. The results indicate that the optimal contract in this scenario is more flexible and can better account for the uncertainty in v and c. The paper also discusses the implications of these findings for the form of the optimal second-best contract. It shows that when parties are risk-averse or take actions that affect the surplus, the optimal contract must account for these factors. The paper concludes that the ability to verify messages significantly affects the design of the optimal contract, and that the optimal contract in Case B is more flexible and better suited to handle uncertainty.