Competitive Markets without Commitment

Nick Netzer and Florian Scheuer

Journal of Political Economy, 2010, vol. 118, issue 6, 1079 - 1109

Abstract: In the presence of a time-inconsistency problem with agency contracts, we show that competitive markets can implement allocations that Pareto-dominate those achieved by a benevolent government, and they induce more effort. We analyze a model with moral hazard and a two-sided lack of commitment. After agents have chosen their work, firms can modify contracts and agents can switch firms. If the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals, it is Pareto superior to a government's allocation with a complete breakdown of incentives. Moreover, competitive markets without commitment implement more effort in equilibrium under general conditions.

Date: 2010
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Working Paper: Competitive Markets without Commitment (2010)
Working Paper: Competitive Markets without Commitment (2008)
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