A signaling-based theory of contractual commitment to relationships

Abstract

In this paper I present signaling as an explanation for how and why parties commit to relationships when they initially contract about the terms of those relationships. Two forms of contractual commitment to a relationship are considered: a promise to trade in the future (contracted quantity); and a promise not to trade with anyone else (contracted exclusivity). A party is said to commit more to a relationship if it commits initially to trade a higher quantity and/or to a higher level of exclusivity. I characterize equilibrium contracts and therefore commitment. Both the ability to signal information through an exclusivity commitment and whether the informed party commits more to the relationship when the relationship is more likely to succeed depend on the source of the asymmetry of information.