Hidden Commitment Power is Powerless

Hongcheng Li

Papers from arXiv.org

Abstract: A principal who offers a contract may renege when her default option is sufficiently attractive. The size of this temptation, which measures her commitment power, is often her private information. This paper asks how contracting outcomes change under this information asymmetry. Disciplining off-path beliefs with the Intuitive Criterion, I find that every type of principal behaves and earns payoffs exactly as if she were commonly known to have the least commitment power. Hidden commitment power is therefore powerless. Commitment power is valuable under symmetric information. Concealing it is what destroys its value. The result delivers an unambiguous policy lesson on how to mitigate this information asymmetry prior to contracting: only measures that improve the worst case have value. Applied to credit rating, optimal disclosure is monotone-partitional, and each issuer contracts on the floor of her rating band.

Date: 2026-06, Revised 2026-07
New Economics Papers: this item is included in nep-des and nep-mic
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