Commitments with Third Parties

Observable irrevocable contracts between a principal and an agent have been suggested as a way in which the principal can enhance his payoff when playing a game against, or bargaining with, an opponent. It is shown that such beneficial agency relationships depend on the ability of the principal either to cut off further communication with his own agent or to cut the agent off from the opponent. With full communication, an unrestricted three-player bargaining phase will follow the contracting. In such a two-phase model, it is shown that the principal can never do better by employing an agent than he could have alone. Only contracts that result in either the principal's or the agent's payoffs being non-monotonic in the bargaining share they achieve have any potential to benefit the principal. But these contracts can be turned against him. The opponent can make another contract offer to the agent which, if superimposed on the principal's original contract, will result in an outcome that is actually worse for the principal than the solution of the original two-person problem.