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A Theory of Credibility under Commitment

Author

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  • Monte Daniel

    (Simon Fraser University)

Abstract

The ability to commit to a contract may increase a player's payoff. In a repeated relationship, the lack of a complete contingency contract is usually explained by the presence of contracting costs. We study optimal contracts in a specific class of credibility models: relationships in which the surplus comes solely from screening. We show that the optimal contract is to reproduce the Perfect Bayesian Equilibrium of the game without commitment. In this sense, sequential rationality constraints do not bind. Therefore, we provide an alternative explanation for why a specific class of long-term relationships may often not be contracted upon.

Suggested Citation

  • Monte Daniel, 2010. "A Theory of Credibility under Commitment," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-15, July.
    • Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:33
    DOI: 10.2202/1935-1704.1591
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    References listed on IDEAS

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    1. Robert J. Aumann, 1995. "Repeated Games with Incomplete Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011476, December.
    2. Rey, Patrick & Salanie, Bernard, 1990. "Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting," Econometrica, Econometric Society, vol. 58(3), pages 597-619, May.
    3. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-862, August.
    4. Balder, Erik J., 1996. "On the Existence of Optimal Contract Mechanisms for Incomplete Information Principal-Agent Models," Journal of Economic Theory, Elsevier, vol. 68(1), pages 133-148, January.
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