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Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard

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  • Michael L. Katz

Abstract

"A large literature examines the use of observable and unrenegotiable agency contracts as commitments. These analyses generally impose an ad hoc restriction that contracts cannot be contingent on one another. I relax this restriction and obtain a folk theorem. Unlike earlier folk theorems in this area, the present result applies to agency relationships that have hidden-action problems. Using an example, I also demonstrate that there are settings in which interdependent contracts support a strictly larger set of equilibrium outcomes than do independent contracts. The result highlights the critical need for careful thought about restrictions placed on the set of feasible contracts." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 15 (2006)
Issue (Month): 3 (09)
Pages: 685-706

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Handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:685-706

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Citations

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Cited by:
  1. Guido Merzoni, 2008. "Observable and Renegotiable Contracts as Commitments to Cooperate," DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo dis0801, Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS).
  2. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 586-597, March.
  3. Levent Kockesen & Emanuele Gerratana, 2009. "Strategic Effects of Incomplete and Renegotiation-Proof Contracts," Koç University-TUSIAD Economic Research Forum Working Papers 0908, Koc University-TUSIAD Economic Research Forum.
  4. Ritz, R.A., 2012. "On welfare losses due to imperfect competition," Cambridge Working Papers in Economics 1234, Faculty of Economics, University of Cambridge.
  5. Peters, Michael & Szentes, Balazs, 2009. "Definable and Contractible Contracts," Microeconomics.ca working papers michael_peters-2009-7, Vancouver School of Economics, revised 13 May 2010.
  6. Robert Ritz, 2013. "On welfare losses due to imperfect competition," Cambridge Working Papers in Economics 1334, Faculty of Economics, University of Cambridge.
  7. Emanuele Gerratana & Levent Koçkesen, 2013. "Commitment without Reputation: Renegotiation-Proof Contracts under Asymmetric Information," Koç University-TUSIAD Economic Research Forum Working Papers 1323, Koc University-TUSIAD Economic Research Forum.
  8. Levent Koçkesen & Emanuele Gerratana, 2008. "Delegation with Incomplete and Renegotiable Contracts," Koç University-TUSIAD Economic Research Forum Working Papers 0803., Koc University-TUSIAD Economic Research Forum.

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