A Theory of Credibility under Commitment
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.
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Volume (Year): 10 (2010)
Issue (Month): 1 (July)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Douglas W. Diamond, 1998.
"Reputation Acquisition in Debt Markets,"
Levine's Working Paper Archive
602, David K. Levine.
- 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.
- 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.
- Robert J. Aumann, 1995. "Repeated Games with Incomplete Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011476.
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