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Competitive Markets without Commitment

Author

Listed:
  • Nick Netzer

    (Socioeconomic Institute, University of Zurich)

  • Florian Scheuer

    (Massachusetts Institute of Technology)

Abstract

In the presence of a time-inconsistency problem with optimal agency contracts, we show that competitive markets implement allocations that Pareto dominate those achieved by a benevolent planner, they induce strictly more effort, and they sometimes make the commitment problem disappear entirely. In particular, we analyze a model with moral hazard and two-sided lack of commitment. After agents have chosen a hidden effort and the need to provide incentives has vanished, firms can modify their contracts and agents can switch firms. As long as the ex-post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals who choose different effort levels, the market allocation is Pareto superior to a social planner�s allocation. We construct a specific market game that naturally generates robust equilibria with these properties. In addition, we show that equilibrium contracts without commitment are identical to those with full commitment if the latter involve no cross-subsidization between individuals who choose different effort levels.

Suggested Citation

  • Nick Netzer & Florian Scheuer, 2008. "Competitive Markets without Commitment," SOI - Working Papers 0814, Socioeconomic Institute - University of Zurich.
    • Handle: RePEc:soz:wpaper:0814
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    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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