Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard

Michael Katz ()

Journal of Economics & Management Strategy, 2006, vol. 15, issue 3, 685-706

Abstract: A large literature examines the use of observable and unrenegotiable agency contracts as commitments. These analyses generally impose an ad hoc restriction that contracts cannot be contingent on one another. I relax this restriction and obtain a folk theorem. Unlike earlier folk theorems in this area, the present result applies to agency relationships that have hidden‐action problems. Using an example, I also demonstrate that there are settings in which interdependent contracts support a strictly larger set of equilibrium outcomes than do independent contracts. The result highlights the critical need for careful thought about restrictions placed on the set of feasible contracts.

Date: 2006
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https://doi.org/10.1111/j.1530-9134.2006.00114.x

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