Do Autocrats Break Their Promises? A Principal-Agent Problem with Limited Commitment
Abstract
This research focuses on the principal-agent problem, when both the principal and the agent are constrained only by limited commitment. Contrary to the conventional wisdom that lack of commitment would harm the principal’s benefits in the contracting, we find that the principal could obtain positive marginal benefits with a higher probability of contract default when the cost to breach the contract is low. The driving forces behind this result are that the agent would also choose a higher probability of false reporting under a higher probability of contract default, which leads to a lower scheduled payment from the principal in the equilibrium. Our results shed light to the historical contexts where autocratic rulers could gain stronger control over their subordinates when their absolute power allows them to rule above the law.
