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Competitive Markets without Commitment

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  • Nick Netzer
  • Florian Scheuer

Abstract

In the presence of a time-inconsistency problem with agency contracts, we show that competitive markets can implement allocations that Pareto-dominate those achieved by a benevolent government, and they induce more effort. We analyze a model with moral hazard and a two-sided lack of commitment. After agents have chosen their work, firms can modify contracts and agents can switch firms. If the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals, it is Pareto superior to a government's allocation with a complete breakdown of incentives. Moreover, competitive markets without commitment implement more effort in equilibrium under general conditions.
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  • Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," NajEcon Working Paper Reviews 814577000000000462, www.najecon.org.
    • Handle: RePEc:cla:najeco:814577000000000462
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    Cited by:

    1. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
    2. Letina, Igor & Liu, Shuo & Netzer, Nick, 2020. "Delegating performance evaluation," Theoretical Economics, Econometric Society, vol. 15(2), May.
    3. Florian Scheuer & Alexander Wolitzky, 2016. "Capital Taxation under Political Constraints," American Economic Review, American Economic Association, vol. 106(8), pages 2304-2328, August.
    4. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079-1109.
    5. Benito Arruñada & Giorgio Zanarone & Nuno Garoupa, 2019. "Property Rights in Sequential Exchange," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 35(1), pages 127-153.
    6. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
    7. Drenik, Andres & Perez-Truglia, Ricardo, 2018. "Sympathy for the diligent and the demand for workfare," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 77-102.
    8. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent Is Free to Leave," IZA Discussion Papers 5027, Institute of Labor Economics (IZA).
    9. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    10. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 187-211, August.
    11. John William Hatfield & Fuhito Kojima & Yusuke Narita, 2011. "Promoting School Competition Through School Choice: A Market Design Approach," Working Papers 2011-018, Human Capital and Economic Opportunity Working Group.
    12. Dosis, Anastasios, 2018. "On signalling and screening in markets with asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 140-149.
    13. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
    14. Jenny Simon, 2011. "Financial Markets as a Commitment Device for the Government," 2011 Meeting Papers 447, Society for Economic Dynamics.
    15. Gemmo, Irina & Browne, Mark J. & Gründl, Helmut, 2017. "Transparency aversion and insurance market equilibria," ICIR Working Paper Series 25/17, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    16. Wanda Mimra & Achim Wambach, 2011. "A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection," CESifo Working Paper Series 3412, CESifo.
    17. Ariel Zetlin-Jones, "undated". "Efficient Financial Crises," GSIA Working Papers 2014-E19, Carnegie Mellon University, Tepper School of Business.
    18. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
    19. Michael Junho Lee & Daniel Neuhann, 2019. "A Dynamic Theory of Collateral Quality and Long-Term Interventions," Staff Reports 894, Federal Reserve Bank of New York.
    20. Nick Netzer & Florian Scheuer, 2014. "A Game Theoretic Foundation Of Competitive Equilibria With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 399-422, May.
    21. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2018. "On competing mechanisms under exclusive competition," Games and Economic Behavior, Elsevier, vol. 111(C), pages 1-15.
    22. Dosis, Anastasios, 2022. "Price caps and efficiency in markets with adverse selection," Journal of Mathematical Economics, Elsevier, vol. 99(C).
    23. Yiqing Xing & Anqi Li, 2014. "Simple Labor Income Tax Systems with Endogenous Employment Contracts," 2014 Meeting Papers 866, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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