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Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard

  • Michael L. Katz

"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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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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