Mandatory Price Adjustment Clauses in Subcontracting: Economic Rationale and the Korean Experience

Abstract This study examines the economic rationale and policy implications of Korea’s recent mandate requiring the inclusion of price adjustment clauses, formally titled “Adjustment of Price of Delivered Goods due to Fluctuation in Supply Costs.” Introduced in 2023 amid heightened input price volatility, the law requires subcontracting and entrustment contracts to incorporate price adjustment mechanisms. Such clauses can enhance the stability of long-term transactions by facilitating risk sharing under uncertainty and protecting relationship-specific investments. However, their uniform imposition may generate unintended effects. These include distorted incentives, adjustments in other contractual dimensions, and potential reduction in consumer welfare. Based on this analysis, the study discusses policy implications for the design and implementation of price adjustment framework.