Commitment without reputation: renegotiation-proof contracts under asymmetric information

Emanuele Gerratana () and Levent Kockesen

Review of Economic Design, 2015, vol. 19, issue 3, 173-209

Abstract: This paper characterizes equilibrium outcomes of extensive form games with incomplete information in which players sign renegotiable contracts with third parties. Our aim is to understand the extent to which third-party contracts can be used as commitment devices when it is impossible to commit not to renegotiate them. We characterize renegotiation-proof contracts and strategies for extensive form games with incomplete information and apply our results to two-stage games. If contracts are observable, then the second mover obtains the best possible payoff given that she plays an incentive compatible and renegotiation-proof strategy and the first mover best responds. If contracts are unobservable, then any Bayesian Nash equilibrium outcome of the original game in which the second mover plays an incentive compatible and renegotiation-proof strategy can be supported. We apply our results to Stackelberg competition and show that renegotiation-proofness imposes a very simple restriction. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Third-party contracts; Commitment; Strategic delegation; Renegotiation; Asymmetric information; Renegotiation-proofness; Entry-deterrence; C72; D80; L13 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Commitment without Reputation: Renegotiation-Proof Contracts under Asymmetric Information (2013)
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DOI: 10.1007/s10058-015-0174-9

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