Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240533 
Year of Publication: 
2021
Series/Report no.: 
IFN Working Paper No. 1390
Publisher: 
Research Institute of Industrial Economics (IFN), Stockholm
Abstract: 
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.
Subjects: 
Constrained contracting
Escape clauses
Endogenously incomplete commitment
Ratchet effect
Revelation principle
JEL: 
D82
D84
D86
Document Type: 
Working Paper

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