A Theory of Endogenous Commitment

CEMFI Working Paper No. 0206

40 Pages Posted: 13 Oct 2002

See all articles by Guillermo Caruana

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI)

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 28, 2003


Commitment is typically modeled by giving one of the players the opportunity to take an initial binding action. The drawback to this approach is that the fundamental question of who has the opportunity to commit is driven by a modeling decision. This paper presents a framework in which commitment power arises naturally from the fundamentals of the model. We construct a finite dynamic game in which players are given the option to change their minds as often as they want, but pay a switching cost if they do so. We show that for two-player games there is a unique subgame perfect equilibrium with a simple structure. This equilibrium is independent of the order of moves and robust to other protocol specifications. Moreover, despite the perfect information nature of the model and the costly switches, strategic delays may arise in equilibrium. The flexibility of the model allows us to apply it to many different environments. In particular, we study an entrydeterrence situation and a bargaining setting. The predictions for these are intuitive and illustrate how commitment power is endogenously determined.

Keywords: Commitment, entry, switching costs

JEL Classification: C7, C73

Suggested Citation

Caruana, Guillermo and Einav, Liran, A Theory of Endogenous Commitment (February 28, 2003). CEMFI Working Paper No. 0206. Available at SSRN: https://ssrn.com/abstract=336941 or http://dx.doi.org/10.2139/ssrn.336941

Guillermo Caruana (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Liran Einav

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
United States
650-723-3704 (Phone)
928-223-4973 (Fax)

National Bureau of Economic Research (NBER)

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United States

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