Contracts on Unilateral Commitment

Since Schelling's seminal work on bargaining, it has been a common intuition that two parties cannot form a contract with positive expectation damages (let alone one that is renegotiation proof), if outside of the contract each would have no interests in what the other would or could do. After all, how could a contract in of itself create an interest that would result in damages? Herein we describe a contract by which two parties each hoping to effect its own unilateral commitment may in fact enjoy expectation damages, disproving the intuition. The novelty of the arrangement is an exchange of promises--a contract--rather than a single promise from one party to the other. In our model, the latter case indeed annihilates positive expectation damages. Applications include dynamic consistency and international finance policy, bargaining and M&As, industrial organization, and principal-agent contracts