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Hidden Commitment Power is Powerless

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  • Hongcheng Li

Abstract

A principal who offers a contract may renege when her default option is sufficiently attractive. The size of this temptation, which measures her commitment power, is often her private information. This paper asks how contracting outcomes change under this information asymmetry. Disciplining off-path beliefs with the Intuitive Criterion, I find that every type of principal behaves and earns payoffs exactly as if she were commonly known to have the least commitment power. Hidden commitment power is therefore powerless. The result delivers an unambiguous policy lesson on how to mitigate this information asymmetry prior to contracting: only measures that improve the worst case have value. Applied to credit rating, it rationalizes the monotone-partitional structure widely used in practice.

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  • Hongcheng Li, 2026. "Hidden Commitment Power is Powerless," Papers 2606.02769, arXiv.org.
    • Handle: RePEc:arx:papers:2606.02769
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