Commitment through Renegotiation-Proof Contracts with Third Parties.

This paper analyzes contracts as means of strategic commitment against outside parties. It considers the ex ample of an incumbent firm that enters a contractual relationship wit h its workers in order to deter entry. The parties cannot precommit n ot to renegotiate the contract once entry has taken place. If the inc umbent firm or workers possess some private information, excessive po stentry production levels can be sustained ex post, since output redu ctions may not be incentive compatible. Information asymmetries can t hus be welfare-improving for the contracting parties when commitment against outsiders is the goal of the contract. Copyright 1988 by The Review of Economic Studies Limited.