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Competitive Markets without Commitment

Nick Netzer and Florian Scheuer
Journal of Political Economy
Vol. 118, No. 6 (December 2010), pp. 1079-1109
DOI: 10.1086/658497
Stable URL: http://www.jstor.org/stable/10.1086/658497
Page Count: 31
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Competitive Markets without Commitment
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Abstract

In the presence of a time-inconsistency problem with agency contracts, we show that competitive markets can implement allocations that Pareto-dominate those achieved by a benevolent government, and they induce more effort. We analyze a model with moral hazard and a two-sided lack of commitment. After agents have chosen their work, firms can modify contracts and agents can switch firms. If the ex post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals, it is Pareto superior to a government’s allocation with a complete breakdown of incentives. Moreover, competitive markets without commitment implement more effort in equilibrium under general conditions.

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