Hidden Commitment Power is Powerless (opens in new tab)

A principal who offers a contract may renege when her default option is sufficiently attractive. The size of this temptation, which measures her commitment power, is often her private information. This paper asks how contracting outcomes change under this information asymmetry. Disciplining off-path beliefs with the Intuitive Criterion, I find that every type of principal behaves and earns payoffs exactly as if she were commonly known to have th...