Abstract: Contract incompleteness directly leads the manufacturer innovative investment to be hung up at the buyer-supplier relation. The parties can make up for this incompleteness to some extent by building into the contract a mechanism for revising the contract as each of them receives symmetric information. when a contract is being used to facilitate the trade between a supplier and a manufacturer who must undertake cost reducing investments, there is generally no possibility to implement the first-best for the supply chain because of hung up problem. Designing a coordinative mechanism, by which the parties can rescind the original contract and write a new one, can stimulate manufacturer to implement the first-best investment and derive an optimal initial contract. Finally, some more detail outcomes are derived from a special model and illustrated by an instance.

Key words: incomplete contract, renegotiation, cost reducing investment, coordination, hung up