IDEAS home Printed from https://ideas.repec.org/a/url/upravl/v13y2022i2p20-33.html
   My bibliography  Save this article

Credible commitments in contract relations: Where are the limits of the possible?

Author

Listed:
  • Andrey E. Shastitko

    (Lomonosov Moscow State University, Moscow, Russia; Russian Presidential Academy of National Economy and Public Administration (RANEPA), Moscow, Russia)

Abstract

Credible commitments are the most important condition for contracts sustainability. The effects and ways of ensuring the commitments credibility are discussed in the new institutional economics and game theory. At the same time, there is a number of unresolved issues related to the microeconomic aspects of obligations’ reliability in contracts regarding specific resources. The article delves into various approaches to determining credible commitments in contractual relations at the micro level in the context of bilateral (multilateral) opportunism. The methodological basis of the study is the transaction costs economics. The paper shows the limitations of the compensation approach in modeling credible liabilities and explains the importance of relational credible commitments for ensuring sustainability and effectiveness of contracts. The author proposes an extended model of hostages in contracts using specific resources as a way of solving the “ugly princess” problem. Based on the specification of the temporal structure of contracting, we develop a game-theoretic model that takes into account the possibilities of opportunism on the part of both the pledger and the pledgee as an investor in specific assets. The study demonstrates the consequences of the wrong hostage chosen, as well as the characteristics of the interaction equilibrium due to the correct choice of it with an indication of the residual opportunism problem. The research provides a rationale why the promisee and the potential purchaser of full rights to an asset acting as a hostage are not always the same actor. The approaches to dealing with credible commitments in the context of renegotiations and multilateral contracts are outlined. The research results can serve as a basis for designing contracts requiring reciprocal collateral.

Suggested Citation

  • Andrey E. Shastitko, 2022. "Credible commitments in contract relations: Where are the limits of the possible?," Upravlenets, Ural State University of Economics, vol. 13(2), pages 20-33, May.
    • Handle: RePEc:url:upravl:v:13:y:2022:i:2:p:20-33
    DOI: 10.29141/2218-5003-2022-13-2-2
    as

    Download full text from publisher

    File URL: https://upravlenets.usue.ru/images/96/2.pdf
    Download Restriction: no
    File URL: https://upravlenets.usue.ru/en/issues-2022/991
    Download Restriction: no
    File URL: https://libkey.io/10.29141/2218-5003-2022-13-2-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(4), pages 803-832, December.
    2. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    3. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
    4. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    5. Dnes, Antony W., 2003. "Hostages, marginal deterrence and franchise contracts," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 317-331, June.
    6. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-540, September.
    7. Furubotn, Eirik G., 2001. "The new institutional economics and the theory of the firm," Journal of Economic Behavior & Organization, Elsevier, vol. 45(2), pages 133-153, June.
    8. A. Shastitko., 2006. "Credible Commitments in Contract Relations," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Darcy W E Allen, 2020. "When Entrepreneurs Meet:The Collective Governance of New Ideas," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number q0269, January.
    2. Raul V. Fabella, 2012. "Signaling and Contract Cost Under Weak Governance : Water Service Privatization in Metro-Manila, Philippines," UP School of Economics Discussion Papers 201213, University of the Philippines School of Economics.
    3. Alejandro Agafonow & Marybel Perez, 2023. "How A Social Enterprise Wanes: The Transaction Costs of Credible Commitments at Etsy.com," Journal of Interdisciplinary Economics, , vol. 35(1), pages 83-107, January.
    4. Buccirossi, Paolo & Spagnolo, Giancarlo, 2006. "Leniency policies and illegal transactions," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1281-1297, August.
    5. Yochanan Shachmurove, 2012. "Failing Institutions Are at the Core of the U.S. Financial Crisis," PIER Working Paper Archive 12-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    6. Williamson, Oliver E., 2010. "Transaction Cost Economics: The Natural Progression," Journal of Retailing, Elsevier, vol. 86(3), pages 215-226.
    7. Meijerink, Gerdien W., 2007. "If services aren't delivered, people won't pay: the role of measurement problems and monitoring in Payments for Environmental Services," 106th Seminar, October 25-27, 2007, Montpellier, France 7948, European Association of Agricultural Economists.
    8. Lowell R. Jacobsen, 2004. "Whither franchising? The case of Avis Europe PLC," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(8), pages 525-535.
    9. Michael Bradley & Elisabeth de Fontenay & Irving Arturo de Lira Salvatierra & Mitu Gulati, 2018. "Pricing Sovereign Debt: Foreign versus Local Parameters," European Financial Management, European Financial Management Association, vol. 24(2), pages 261-297, March.
    10. Šastitko, Andrej E., 2013. "Effects of third party errors," EconStor Preprints 121747, ZBW - Leibniz Information Centre for Economics.
    11. Thomas J. Miceli & Kathleen Segerson, 2007. "Punishing the Innocent along with the Guilty: The Economics of Individual versus Group Punishment," The Journal of Legal Studies, University of Chicago Press, vol. 36(1), pages 81-106, January.
    12. Christian Balcells, 2022. "Determinants of firm boundaries and organizational performance: an empirical investigation of the Chilean truck market," Journal of Evolutionary Economics, Springer, vol. 32(2), pages 423-461, April.
    13. Hanan G. Jacoby & Ghazala Mansuri, 2010. "Watta Satta: Bride Exchange and Women's Welfare in Rural Pakistan," American Economic Review, American Economic Association, vol. 100(4), pages 1804-1825, September.
    14. Sexton, Richard J., 1991. "Game Theory: A Review With Applications To Vertical Control In Agricultural Markets," Working Papers 225865, University of California, Davis, Department of Agricultural and Resource Economics.
    15. Sonal Pandya & David Leblang, 2017. "Risky business: Institutions vs. social networks in FDI," Economics and Politics, Wiley Blackwell, vol. 29(2), pages 91-117, July.
    16. Matthew J. Baker, 2004. "Human Capital and Hold-ups in Indigenous Society: The Role of Customs and the Market," Departmental Working Papers 7, United States Naval Academy Department of Economics.
    17. Muñoz-Herrera, Manuel & Palacio, Luis Alejandro, 2014. "Drug Dealing In Bucaramanga: Case Study In A Drug Producing Country," MPRA Paper 58523, University Library of Munich, Germany.
    18. Surajeet Chakravarty, 2005. "Resolving Contractual Disputes: Arbitration vs Mediation," The Centre for Market and Public Organisation 05/117, The Centre for Market and Public Organisation, University of Bristol, UK.
    19. Alexander Klein, 2000. "Jail or Fine - Let Them Choose," Econometric Society World Congress 2000 Contributed Papers 0337, Econometric Society.
    20. Peters, Frank, 2018. "The business of video games is a multi-player game : Essays on governance choices and performance in a two-sided market in the cultural industries," Other publications TiSEM 886b3148-4bbb-4ea4-b666-0, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    opportunism; credible commitments; trust; hostages; contracts; 'ugly princess' problem;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:url:upravl:v:13:y:2022:i:2:p:20-33. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Victor Blaginin (email available below). General contact details of provider: https://edirc.repec.org/data/usueeru.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.