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Competitive Markets without Commitment

Author

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  • Nick Netzer

    (Socioeconomic Institute, University of Zurich)

  • Florian Scheuer

    (Massachusetts Institute of Technology)

Abstract

In the presence of a time-inconsistency problem with optimal agency contracts, we show that competitive markets implement allocations that Pareto dominate those achieved by a benevolent planner, they induce strictly more effort, and they sometimes make the commitment problem disappear entirely. In particular, we analyze a model with moral hazard and two-sided lack of commitment. After agents have chosen a hidden effort and the need to provide incentives has vanished, firms can modify their contracts and agents can switch firms. As long as the ex-post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals who choose different effort levels, the market allocation is Pareto superior to a social planner�s allocation. We construct a specific market game that naturally generates robust equilibria with these properties. In addition, we show that equilibrium contracts without commitment are identical to those with full commitment if the latter involve no cross-subsidization between individuals who choose different effort levels.

Suggested Citation

  • Nick Netzer & Florian Scheuer, 2008. "Competitive Markets without Commitment," SOI - Working Papers 0814, Socioeconomic Institute - University of Zurich.
    • Handle: RePEc:soz:wpaper:0814
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    References listed on IDEAS

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    2. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079-1109.
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    Cited by:

    1. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
    2. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2010. "Optimal Incentive Contracts under Moral Hazard When the Agent is Free to Leave," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 329, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Nick Netzer & Florian Scheuer, 2014. "A Game Theoretic Foundation Of Competitive Equilibria With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 399-422, May.
    4. Attar, Andrea & Campioni, Eloisa & Piaser, Gwenaël, 2018. "On competing mechanisms under exclusive competition," Games and Economic Behavior, Elsevier, vol. 111(C), pages 1-15.
    5. Letina, Igor & Liu, Shuo & Netzer, Nick, 2020. "Delegating performance evaluation," Theoretical Economics, Econometric Society, vol. 15(2), May.
    6. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079-1109.
    7. Drenik, Andres & Perez-Truglia, Ricardo, 2018. "Sympathy for the diligent and the demand for workfare," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 77-102.
    8. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    9. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
    10. Benito Arruñada & Giorgio Zanarone & Nuno Garoupa, 2019. "Property Rights in Sequential Exchange," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 35(1), pages 127-153.
    11. Dosis, Anastasios, 2018. "On signalling and screening in markets with asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 140-149.
    12. Florian Scheuer & Alexander Wolitzky, 2016. "Capital Taxation under Political Constraints," American Economic Review, American Economic Association, vol. 106(8), pages 2304-2328, August.
    13. Jenny Simon, 2011. "Financial Markets as a Commitment Device for the Government," 2011 Meeting Papers 447, Society for Economic Dynamics.
    14. Gemmo, Irina & Browne, Mark J. & Gründl, Helmut, 2017. "Transparency aversion and insurance market equilibria," ICIR Working Paper Series 25/17, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    15. Ariel Zetlin-Jones, "undated". "Efficient Financial Crises," GSIA Working Papers 2014-E19, Carnegie Mellon University, Tepper School of Business.
    16. Yiqing Xing & Anqi Li, 2014. "Simple Labor Income Tax Systems with Endogenous Employment Contracts," 2014 Meeting Papers 866, Society for Economic Dynamics.
    17. John William Hatfield & Fuhito Kojima & Yusuke Narita, 2011. "Promoting School Competition Through School Choice: A Market Design Approach," Working Papers 2011-018, Human Capital and Economic Opportunity Working Group.
    18. Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(2), pages 187-211, August.
    19. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening and Multitasking," Post-Print hal-04527031, HAL.
    20. Wanda Mimra & Achim Wambach, 2011. "A Game-Theoretic Foundation for the Wilson Equilibrium in Competitive Insurance Markets with Adverse Selection," CESifo Working Paper Series 3412, CESifo.
    21. Michael Junho Lee & Daniel Neuhann, 2019. "A Dynamic Theory of Collateral Quality and Long-Term Interventions," Staff Reports 894, Federal Reserve Bank of New York.
    22. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
    23. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
    24. Dosis, Anastasios, 2022. "Price caps and efficiency in markets with adverse selection," Journal of Mathematical Economics, Elsevier, vol. 99(C).

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    More about this item

    Keywords

    Time-Inconsistency; Moral Hazard; Competitive Markets; Adverse Selection;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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