Abstract: We consider a mechanism design problem between a principal and a single agent. Contracting is costly such that not every type of agent can be offered a type-contingent contract, so involving incomplete commitment that arises endogenously through the option to invoke an escape clause. Escape clauses are commonly used in regulation and procurement; they specify a subset of cost realizations ex ante for which the menu of initial contracts is void. We so explain under what conditions a principal may benefit from designing contracts with an escape clause and derive trade-offs in the design.

more information:

https://wolfgick.files.wordpress.com/2020/08/contracting_with_endogenous_commitment_august_18_2020.pdf