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  • Annales d'économie et de statistique

Commitments with Third Parties

By: Jerry R. Green
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Abstract

Observable irrevocable contracts between a principal and an agent have been suggested as a way in which the principal can enhance his payoff when playing a game against, or bargaining with, an opponent. It is shown that such beneficial agency relationships depend on the ability of the principal either to cut off further communication with his own agent or to cut the agent off from the opponent. With full communication, an unrestricted three-player bargaining phase will follow the contracting. In such a two-phase model, it is shown that the principal can never do better by employing an agent than he could have alone. Only contracts that result in either the principal's or the agent's payoffs being non-monotonic in the bargaining share they achieve have any potential to benefit the principal. But these contracts can be turned against him. The opponent can make another contract offer to the agent which, if superimposed on the principal's original contract, will result in an outcome that is actually worse for the principal than the solution of the original two-person problem.

Citation

Green, Jerry R. "Commitments with Third Parties." Annales d'économie et de statistique, nos. 25-26 (January–June 1992): 81–95.
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About The Author

Jerry R. Green

Negotiation, Organizations & Markets
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More from the Author
  • Two Representations of Information Structures and Their Comparisons By: Jerry R. Green and Nancy L. Stokey
  • Assent-maximizing Social Choice By: Katherine A. Baldiga and Jerry R. Green
  • Let the Right One In: A Microeconomic Approach to Partner Choice in Mutualisms By: Marco Archetti, Francisco Ubeda, Drew Fudenberg, Jerry R. Green, Naomi E. Pierce and Douglas W. Yu
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