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Commitment without reputation: renegotiation-proof contracts under asymmetric information

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  • Emanuele Gerratana
  • Levent Koçkesen

Abstract

This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players sign renegotiable contracts with third parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to two-stage games. If contracts are observable, then the second mover obtains the best possible payoff given that she plays an incentive compatible and renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then any Bayesian Nash equilibrium outcome of the original game in which the second mover plays an incentive compatible and renegotiation-proof strategy can be supported. We apply our results to Stackelberg competition and show that renegotiation-proofness imposes a very simple restriction. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Emanuele Gerratana & Levent Koçkesen, 2015. "Commitment without reputation: renegotiation-proof contracts under asymmetric information," Review of Economic Design, Springer;Society for Economic Design, vol. 19(3), pages 173-209, September.
    • Handle: RePEc:spr:reecde:v:19:y:2015:i:3:p:173-209
    DOI: 10.1007/s10058-015-0174-9
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    More about this item

    Keywords

    Third-party contracts; Commitment; Strategic delegation; Renegotiation; Asymmetric information; Renegotiation-proofness; Entry-deterrence; C72; D80; L13;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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