Abstract
This article examines the effect of most favored nation (MFN) clauses on investment. I find that MFN clauses can increase incentives to invest in product quality. I provide sufficient conditions for when MFN clauses increase investments relative to fixed price contracts. I also find that in some circumstances MFN clauses weaken investment incentives and reduce total welfare. Bilateral negotiating partners may have an incentive to adopt MFN clauses that reduce overall welfare because MFN clauses may benefit the negotiating parties but also extract surplus from third parties. I show that in some cases negotiating parties may be compelled by MFN clauses to enter into a contract even if more efficient investment is achieved without a contract.
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