Bargaining and the observability of contractual commitments via third parties

Günther Lang

International Advances in Economic Research, 2001, vol. 7, issue 2, 213-230

Abstract: This paper analyzes a two-stage model of bilateral bargaining where one of the agents has the option to delegate. A first approach is to assume that the contract between the agent and his representative is perfectly observable and can be renegotiated. Commitment effects arise although renegotiation is possible. Then, perfect observability of the contract is weakened to observe it with certain probability. Commitment effects as pure-strategy equilibria exist if this probability is sufficiently close to 1, in contrast to Bagwell's [1995] findings that imperfect observability undermines commitment. Considering the realistic case of the actual agreement between two parties being private information, the commitment value as equilibrium outcome disappears since having closed a renegotiation-proof contract offers costless self-insurance against strategic misunderstandings. Copyright International Atlantic Economic Society 2001

Date: 2001
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DOI: 10.1007/BF02296010

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