Commitment in Multiperiod Information Models

Commitment in Multiperiod Information Models

1985Working Paper No. 809

The role of commitment is studied in the context of a multiperiod contracting model in which a supplier has private information about his costs. When the purchaser is able to make commitments for the duration of the relationship, a separating equilibrium results. When the purchaser can only make commitments within a period, a separating equilibrium results when the supplier is prohibited from quitting the contract if he is fairly treated. Aggregate welfare is greater in this equilibrium than in the former, but the purchaser is worse off and the supplier better off. If the supplier can quit at any time, the equilibrium contract for the first period cannot be separating over any interval.