On the Value of Commitment with Asymmetric Information

Patrick Rey and Bernard Salanié

Econometrica, 1996, vol. 64, issue 6, 1395-1414

Abstract: The authors show in this paper that renegotiable short-term contracts can be as efficient as long-term renegotiation-proof contracts even in situations of asymmetric information. They do so by extending their earlier results on symmetric information models. Some limited commitment thus seems to be a necessary and sufficient condition to achieve long-run efficiency. The authors moreover show that, due to ratchet effects and time inconsistencies in the structure of informational rents, spot contracts are much less efficient under asymmetric information, even is there is no need for intertemporal smoothing. Copyright 1996 by The Econometric Society.

Date: 1996
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