Unobservable Contracts as Precommitments

Abstract

Strategic delegation, Unobservable contracts, C72, D80, L13,

Strategic Effects of Incomplete and Renegotiation-Proof Contracts

“…This is an example illustrating the main results in Koçkesen and Ok (2004) and Koçkesen (2007) which state that all Nash equilibrium outcomes can be supported with unobservable (but complete and non-renegotiable) contracts.…”

“…Koçkesen and Ok (2004) and Koçkesen (2007) addressed the same question within the context of extensive form games and showed that all (and only) Nash equilibrium outcomes of the original game can be supported as a sequential equilibrium outcome of the delegation game. In particular, they showed that outcomes that are not subgame perfect in the original game may arise as a sequential equilibrium outcome of the induced delegation game, i.e., unobservable contracts may have a strategic effect as long as they are non-renegotiable.…”

“…Supporting an outcome in a PBE of the game with third-party contracts depends on the ability of writing a contract that gives proper incentives to the active player to play certain strategies. When contracts are complete, as in Koçkesen and Ok (2004) and Koçkesen (2007), finding such contracts is relatively easy, as incentive compatibility does not arise as a binding constraint. When contracts are incomplete, however, only incentive compatible strategies can be supported.…”

Commitment without reputation: renegotiation-proof contracts under asymmetric information

“…In this case, condition (2) would have the individually rational payoff defined as b 2 ). In that case, the result would be the exact analog of those in models without asymmetric information, i.e., Koçkesen and Ok (2004) and Koçkesen (2007).…”

“…The effects of unobservable and non-renegotiable third-party contracts are also well-understood: Nash equilibrium outcomes of a game with and without third-party contracts are identical (Katz (1991)). In fact, all (and only) Nash equilibrium outcomes of the original game can be supported as a sequential equilibrium outcome of the game with unobservable and non-renegotiable contracts (Koçkesen and Ok (2004) and Koçkesen (2007)). 3 The strategic role of renegotiable contracts is less understood and the pioneering contribution is provided by Dewatripont (1988 Dewatripont (1988), is that by allowing secret renegotiation, Caillaud et al (1995) enhanced the realism of the model and clarified the role of strategic contracting.…”