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A Theory of Credibility under Commitment

Daniel Monte ()

The B.E. Journal of Theoretical Economics, 2010, vol. 10, issue 1, 1-15

Abstract: 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.

Date: 2010
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