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Credible commitments in contract relations: Where are the limits of the possible?

Author

Listed:
  • Andrey E. Shastitko

    (Lomonosov Moscow State University, Moscow, Russia; Russian Presidential Academy of National Economy and Public Administration (RANEPA), Moscow, Russia)

Abstract

Credible commitments are the most important condition for contracts sustainability. The effects and ways of ensuring the commitments credibility are discussed in the new institutional economics and game theory. At the same time, there is a number of unresolved issues related to the microeconomic aspects of obligations’ reliability in contracts regarding specific resources. The article delves into various approaches to determining credible commitments in contractual relations at the micro level in the context of bilateral (multilateral) opportunism. The methodological basis of the study is the transaction costs economics. The paper shows the limitations of the compensation approach in modeling credible liabilities and explains the importance of relational credible commitments for ensuring sustainability and effectiveness of contracts. The author proposes an extended model of hostages in contracts using specific resources as a way of solving the “ugly princess” problem. Based on the specification of the temporal structure of contracting, we develop a game-theoretic model that takes into account the possibilities of opportunism on the part of both the pledger and the pledgee as an investor in specific assets. The study demonstrates the consequences of the wrong hostage chosen, as well as the characteristics of the interaction equilibrium due to the correct choice of it with an indication of the residual opportunism problem. The research provides a rationale why the promisee and the potential purchaser of full rights to an asset acting as a hostage are not always the same actor. The approaches to dealing with credible commitments in the context of renegotiations and multilateral contracts are outlined. The research results can serve as a basis for designing contracts requiring reciprocal collateral.

Suggested Citation

  • Andrey E. Shastitko, 2022. "Credible commitments in contract relations: Where are the limits of the possible?," Upravlenets, Ural State University of Economics, vol. 13(2), pages 20-33, May.
    • Handle: RePEc:url:upravl:v:13:y:2022:i:2:p:20-33
    DOI: 10.29141/2218-5003-2022-13-2-2
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    References listed on IDEAS

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    3. Williamson, Oliver, 2009. "The Theory of the Firm as Governance Structure: From Choice to Contract," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 111-134, December.
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    More about this item

    Keywords

    opportunism; credible commitments; trust; hostages; contracts; 'ugly princess' problem;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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