A Theory of Credibility under Commitment
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Daniel Monte
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.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Topics Article
- Endogenous Investment and Pricing under Uncertainty
- Information Revelation in Markets with Pairwise Meetings: Complete Revelation in Dynamic Analysis
- Optimal Screening by Risk-Averse Principals
- Coordination under the Shadow of Career Concerns
- The Optimal Accuracy Level in Asymmetric Contests
- The Fragmentation of Reputation
- Sharing Risk Efficiently under Suboptimal Punishments for Defection
- Advice from Multiple Experts: A Comparison of Simultaneous, Sequential, and Hierarchical Communication
- Contractual Incompleteness for External Risks
- On Delegation in Contests and the Survival of Payoff Maximizing Behavior
- Optimal Quality Scores in Sponsored Search Auctions: Full Extraction of Advertisers' Surplus
- A Theory of Credibility under Commitment
- Communication Breakdown: Consultation or Delegation from an Expert with Uncertain Bias
- Social Learning in Social Networks
- A Note on the Multidimensional Monopolist Problem and Intertemporal Price Discrimination
- A Note on Rationalizability and Restrictions on Beliefs
- Vote or Shout
- Asymmetry and Collusion in Sequential Procurement: A "Large Lot Last" Policy
- Status, Inequality and Intertemporal Choice
- Designing the Efficient Information-Processing Organization
- Ensuring Quality Provision through Capacity Regulation under Price Competition
- Successive Oligopolies and Decreasing Returns
- Advice by an Informed Intermediary: Can You Trust Your Broker?
- Advances Article
- Non-Bayesian Learning
- Markets versus Negotiations: The Predominance of Centralized Markets
- Crime Reporting: Profiling and Neighbourhood Observation
- Endogenous Two-Sided Markets with Repeated Transactions
- Position Auctions with Budgets: Existence and Uniqueness
- Walrasian Equilibrium and Reputation under Imperfect Public Monitoring
- Price Regulation under Demand Uncertainty
- Linear Demand Systems are Inconsistent with Discrete Choice
- Contributions Article
- Relative Extinction of Heterogeneous Agents
- Profit-Maximizing Sale of a Discrete Public Good via the Subscription Game in Private-Information Environments
- Kinked-Demand Equilibria and Weak Duopoly in the Hotelling Model of Horizontal Differentiation
- The Role of Replication-Invariance: Two Answers Concerning the Problem of Fair Division When Preferences Are Single-Peaked
- Collusive Behavior of Bidders in English Auctions: A Cooperative Game Theoretic Analysis
- Bad Government Can Be Good Politics: Political Reputation, Negative Campaigning, and Strategic Shirking
- Equilibrium Social Hierarchies: A Non-Cooperative Ordinal Status Game
- Bertrand Competition in Markets with Fixed Costs
- Regular Infinite Economies
- Existence of Competitive Equilibrium in Unbounded Exchange Economies with Satiation: A Note
- Quantifying the Cost of Risk in Consumption
- On a Class of Contest Success Functions
- Revealed Preference with Stochastic Demand Correspondence
- Contracting for Dynamic Efficiency
- Existence Advertising, Price Competition and Asymmetric Market Structure
- Global Social Interactions with Sequential Binary Decisions: The Case of Marriage, Divorce, and Stigma
- First-Mover Advantage in a Dynamic Duopoly with Spillover
- Costly Renegotiation in Repeated Bertrand Games
- Policy and Perspective
- Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition
- Understanding UPP
- Upward Pricing Pressure in Horizontal Merger Analysis: Reply to Epstein and Rubinfeld