
doi: 10.2139/ssrn.4674554
handle: 10419/240533
We study mechanism design under endogenously incomplete commitment as it arises in contracting with escape clauses. An escape clause permits the agent to end a contractual relationship under specified circumstances, after which the principal can offer an ex-post contract. Escape clauses are valuable when the maximal number of initial contracts is smaller than the number of agent types. We identify a sufficient condition for incentive optimality of ex-post contracting. Escape clauses are always incentive optimal under severely constrained contracting. On the margin, the optimal escape clause balances the benefit of a better-adapted contract against an increase in dynamic inefficiency.
Revelation principle, D82, Constrained contracting, D84, ddc:330, Escape clauses, Endogenously incomplete commitment, D86, Ratchet effect
Revelation principle, D82, Constrained contracting, D84, ddc:330, Escape clauses, Endogenously incomplete commitment, D86, Ratchet effect
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