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A Theory of Endogenous Commitment

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Author Info
GUILLERMO CARUANA
LIRAN EINAV

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Abstract

Commitment is typically modelled by assigning to one of the players the ability to take an initial binding action. The weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed, as it is assumed. This paper presents a framework in which commitment power arises endogenously from the fundamentals of the model. We construct a finite dynamic game in which players are given the option to change their minds as often as they wish, but pay a switching cost if they do so. We show that for games with two players and two actions there is a unique subgame-perfect equilibrium with a simple structure. This equilibrium is independent of the order and timing of moves and is robust to other protocol specifications. Moreover, despite the perfect information nature of the model and the costly switches, strategic delays may arise in equilibrium. The flexibility of the model allows us to apply it to various environments. In particular, we study an entry deterrence situation. Its equilibrium is intuitive and illustrative of how commitment power is endogenously determined. Copyright 2008 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2007.00470.x
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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 75 (2008)
Issue (Month): 1 (01)
Pages: 99-116
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Handle: RePEc:bla:restud:v:75:y:2008:i:1:p:99-116

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  2. Dirk Bergemann & Stephen Morris, 2007. "An Ascending Auction for Independent Values: Uniqueness and Robustness to Strategic Uncertainty," Cowles Foundation Discussion Papers 1600, Cowles Foundation, Yale University, revised Mar 2007. [Downloadable!]
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  3. Guillermo Caruana & Liran Einav, 2006. "Production Targets," NBER Working Papers 11958, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Liran Einav (Stanford University), 2004. "Not All Rivals Look Alike: An Empirical Model for Discrete Games with Asymmetric Rivals," Econometric Society 2004 North American Winter Meetings 626, Econometric Society. [Downloadable!]
  6. Dirk Bergemann & Stephen Morris, 2007. "Ascending Auction: Uniqueness and Robustness to Strategic Uncertainty," Levine's Bibliography 321307000000000845, UCLA Department of Economics. [Downloadable!]
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  9. Dirk Bergemann & Stephen Morris, 2007. "Dynamic Auctions: Uniqueness and Robustness to Private Information," Levine's Bibliography 321307000000000771, UCLA Department of Economics. [Downloadable!]
  10. Dirk Bergemann & Stephen Morris, 2007. "An Ascending Auction for Interdependent Values: Uniqueness and Robustness to Strategic Uncertainty," Levine's Bibliography 321307000000001000, UCLA Department of Economics. [Downloadable!]
  11. Marko Köthenbürger, 2008. "How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Josep Pijoan-Mas, 2003. "Precautionary Savings Or Working Longer Hours?," Working Papers wp2003_0311, CEMFI. [Downloadable!]
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