Commitment Mechanism Research Articles

Promises, Expectations, and Social Cooperation

Promising serves as an important commitment mechanism by operating on a potential cheater’s internal value system. We present experimental evidence on why people keep their promises, identifying three motives. First, people feel duty bound to keep their promises regardless of whether promisees expect them to do so (promising per se effect). Second, they care about not disappointing promisees’ expectations regardless of whether those expectations were induced by the promise (expectations per se effect). Third, they are even more motivated to avoid disappointing promisees’ expectations when those expectations were induced by a promise (interaction effect). Clear evidence of some of these effects has eluded the prior literature because of limitations inherent to the experimental methods employed. We sidestep those difficulties by using a novel between-subject vignette design. Our results suggest that promising may contribute to the self-reinforcing creation of trust as expectations of performance encourage promise keeping and vice versa.

The Strategic Role of Business Insurance

The use of business insurance has been traditionally studied in a single-firm setting, but in reality preventing operational accidents involves the (unobservable) efforts of multiple firms. We show that, in a multifirm setting, insurance can be used strategically as a commitment mechanism to prevent excessive free riding by other firms. In the presence of wealth imbalances, contracts alone leave wealth-constrained firms with inefficiently low incentives to exert effort (because of limited liability) and firms with sufficient wealth with excessive incentives. Insurance allows the latter to credibly commit to lower effort, thereby mitigating the incentives of the wealth-constrained firms to free ride. This finding shows that insurance can improve the efficiency of risk management efforts by decreasing free-riding problems. This paper was accepted by Yossi Aviv, operations management.

Investors as Stewards of the Commons?

Over the past few years, there has been a significant increase in the number of initiatives seeking to mobilize investor voice towards positive social impact. In this paper, I provide a framework outlining the role of investors as stewards of the commons. While companies are increasingly addressing environmental and social issues that also improve their economic value, for some of these issues individual company action is costly. At the same time, for a further subset of those issues, company action coupled with collaboration between companies is value enhancing. However, collaboration between companies is notoriously difficult and fragile requiring commitment mechanisms. I suggest that a small set of large institutional investors, importantly, but not exclusively, index and quasi-index investors, could provide this commitment mechanism. Common ownership of competitors within industries and long-time horizons in ownership of shares are key characteristics for investors that could act as stewards of the commons. Social pressure fueled by socially responsible investment funds and non-profit organizations and customer pressure from individual investors are critical in mitigating free-rider problems among asset managers and sustaining engagement practices. Finally, I explore the limits and anticompetitive concerns to the theory of change presented here.

Collective Action and Representation in Autocracies: Evidence from Russia's Great Reforms

We explore the relationship between capacity for collective action and representation in autocracies with data from Imperial Russia. Our primary empirical exercise relates peasant representation in new institutions of local self-government to the frequency of peasant unrest in the decade prior to reform. To correct for measurement error in the unrest data and other sources of endogeneity, we exploit idiosyncratic variation in two determinants of peasant unrest: the historical incidence of serfdom and religious polarization. We find that peasants were granted less representation in districts with more frequent unrest in preceding years — a relationship consistent with the Acemoglu- Robinson model of political transitions and inconsistent with numerous other theories of institutional change. At the same time, we observe patterns of redistribution in subsequent years that are inconsistent with the commitment mechanism central to the Acemoglu-Robinson model. Building on these results, we discuss possible directions for future theoretical work.

TOURISM IN HEALTH PROMOTION – A STRATEGY IN STRESS MANAGEMENT AND ORGANIZATIONAL COMMITMENT OF UNIVERSITY ACADEMIC STAFF

Despite the growth of leisure travel and stress coping research based analysis of leisure and tourism, stress coping have been performed rarely. The purpose of the present study is to examine how University staffs cope with stress through participation in leisure and tourism activities, and how work related stress affect their organizational commitment using data collected from a focus group interview approach and a self-developed questionnaire consisting of 25 items design to elicit information about the range of methods university staff used seeking information about leisure, tourism and how to cope with stress and the contribution leisure and tourism intervention to this process, it will further inquire about social, work environment, the frequency and type of leisure tourism activity, health conditions and organizational commitment and work stress coping mechanism. For this purpose the study 45 randomly selected academic staff from all the departments in the faculty of education, in Ahmadu Bello University, Zaria Nigeria was surged to establish the correlation between academic staff leisure and tourism activity and their characteristic life style of their living environment as well as their working conditions the subject were aged between 30-70yrs while their average age was 35 their job included teaching, research, supervision of students project, marking and compiling exams records etc.. Article visualizations:

New Financial Tools for Small Businesses: A Commitment Mechanism to Secure Funding

We suggest new tools for financing small business newcomers that struggle to overcome bank's unwillingness to finance their operations. Prospective clients fear that the supplier may choose willful litigation by breaching the contract in case of potential operating loss in order to postpone his financial expenditures to a later period. We suggest a commitment mechanism whereby the seller undertakes a commitment to pay a bank the amount of the buyer's damages if the seller will not deliver the good. With the mechanism, the bank reports to credit bureaus of the newcomer's failure to pay the buyer's damages to the bank, and this threat makes the newcomer obligation to deliver the good reliable, and thus enables newcomers to overcome the entry barrier created by the risk of willful litigation. We show that the obligation to a bank is a theoretical equivalent to a special binary option, and how the purchase contract and the obligation to a bank as a binary option can be priced. The commitment mechanism may also provide the bank new tools to assess the newcomer's financial risk, and spread the risk of newcomers' bankruptcy by selling the obligations as binary options in an options market or by securitization of the purchase contracts.

Options Compensation as a Commitment Mechanism in Oligopoly Competition

We analyze how CEO stock options compensation can be used as a commitment device in oligopolistic competition. We develop a two‐stage model where shareholders choose managerial compensation to commit their managers to being aggressive in equilibrium. Our results may explain why some shareholders appear to incentivize ‘excessive’ risk taking through stock options compensation. We analyze how our results are impacted by product quality, marginal cost, product differentiation, and industry concentration. As motivation for our research, we show that there exists positive empirical correlation between industry concentration and options compensation vega within a sample of firms, as suggested by our model. Copyright © 2016 John Wiley & Sons, Ltd.

The commitment value of funding pensions

This paper studies how funding public pensions can improve policy outcomes when short-sighted governments cannot commit. We focus on sustainable plans, where optimal nonlinear pensions are not reneged on by sequential governments. Funding pensions is a commitment mechanism. It implies lower contributions than does the second best policy, which reduces temptation to over-redistribute later and to misuse revealed private information. Funding may be preferable even if the population growth rate is higher than the rate of return on assets. Second best optimal policies are also more likely to be renegotiation proof under fully funded pensions.

The Search of Prior Art and the Revelation of Information by Patent Applicants

To learn the patentability of an innovation, both applicant and examiner search through the set of related inventions. The applicant searches first and chooses to reveal his findings to the examiner, who performs a complementary search and decides whether to grant a patent. We analyze this process with a model of bilateral search for information. We show that the applicant may strategically conceal information, and the examiner makes her search contingent upon the revealed information. To remedy information concealment, we focus on two mechanisms: a double-review policy and a commitment mechanism. Both mechanisms induce more revelation of information.

Emergence of Social Punishment and Cooperation through Prior Commitments

Social punishment, whereby cooperators punish defectors, has been suggested as an important mechanism that promotes the emergence of cooperation or maintenance of social norms in the context of the one-shot (i.e. non-repeated) interaction. However, whenever antisocial punishment, whereby defectors punish cooperators, is available, this antisocial behavior outperforms social punishment, leading to the destruction of cooperation. In this paper, we use evolutionary game theory to show that this antisocial behavior can be efficiently restrained by relying on prior commitments, wherein agents can arrange, prior to an interaction, agreements regarding posterior compensation by those who dishonor the agreements. We show that, although the commitment mechanism by itself can guarantee a notable level of cooperation, a significantly higher level is achieved when both mechanisms, those of proposing prior commitments and of punishment, are available in co-presence. Interestingly, social punishment prevails and dominates in this system as it can take advantage of the commitment mechanism to cope with antisocial behaviors. That is, establishment of a commitment system helps to pave the way for the evolution of social punishment and abundant cooperation, even in the presence of antisocial punishment.

Cheating on Political Knowledge Questions in Online Surveys

Survey researchers worry about the quality of data produced by online surveys. One concern is that respondents might cheat on performance questions, such as political knowledge, invalidating their responses. Yet, existing evidence is unclear about the prevalence of cheating, and scholars lack a validated method for coping with the problem. In this paper, we demonstrate that such cheating behavior varies considerably by sample and provide some evidence that it is motivated by self-deceptive enhancement. We experimentally test a variety of methods for reducing cheating and find that common methods, such as timers, are not the most effective approach. By contrast, a commitment mechanism, in which respondents affirm their choice not to cheat, is more efficacious. Although cheating in online surveys can distort estimates of knowledge and decrease the validity of the measure, there are methods for coping with this problem.

Assessing Proposals for New Global Health Treaties: An Analytic Framework.

We have presented an analytic framework and 4 criteria for assessing when global health treaties have reasonable prospects of yielding net positive effects. First, there must be a significant transnational dimension to the problem being addressed. Second, the goals should justify the coercive nature of treaties. Third, proposed global health treaties should have a reasonable chance of achieving benefits. Fourth, treaties should be the best commitment mechanism among the many competing alternatives. Applying this analytic framework to 9 recent calls for new global health treaties revealed that none fully meet the 4 criteria. Efforts aiming to better use or revise existing international instruments may be more productive than is advocating new treaties.

A Commitment Mechanism to Eliminate Willful Contract Litigation

Abstract This paper concerns companies that sell commodities and are in their initial stages of formation and growth. Such companies will often face severe difficulties due to the banking system’s unwillingness to finance their activities before they are able to develop sufficient credit histories. When faced with a loss contract, such a company may prefer to breach and litigate simply in order to gain time before having to pay off its debt, thereby preventing immediate insolvency. We have designed a new financial tool to eliminate this incentive to willfully litigate. Under this mechanism, the seller undertakes an obligation to pay a bank the amount of the buyer’s damages if the seller does not deliver the good on delivery day in accordance with the contract and law. The bank, in turn, undertakes to pay the buyer the amount of her damages if received by the bank. The effect of this mechanism is to shift the buyer’s entitlement to the bank. This increases the seller’s cost of willful litigation: if the seller chooses to breach he will prefer paying the buyer’s damages to the bank in order to avoid any indication of default on the bank’s records, since such an indication will affect his credit rating and access to financial markets in the future. In addition, the mechanism gives the seller an incentive to breach the contract if and only if the contract becomes ex-post inefficient. We also demonstrate ex-ante benefits from the mechanism: by eliminating the risk of willful litigation, established buyers may be willing to raise the contract price, thereby increasing the probability of newcomers’ survival. The mechanism also enables the banking system to screen new companies according to their quality, and use their contracts as collateral. Ultimately, this can result in the newcomer achieving financial stability earlier.

Credibility, preferences, and bilateral investment treaties

When is a commitment mechanism employed as a solution to a time-inconsistency problem? This article provides a nuanced answer to this question by studying bilateral investment treaties (BITs). We develop a game theoretic model of BIT signing in which the government of a capital-importing country and an investor from a capital-exporting country strategically interact. The model predicts that, on the one hand, when host states highly value foreign direct investment (FDI), the likelihood of BITs increases as their judicial institutions lack credibility. On the other hand, when their preferences for FDI are only modest, the likelihood of BITs increases as their judicial institutions become more credible. We employ Cox proportional hazard models to test our hypotheses, and the results largely support our theory. Our findings have broad implications for the large literature on credible commitment, which has paid insufficient attention to the interplay between preferences and credibility.

Some Global Policies for Antibiotic Resistance Depend on Legally Binding and Enforceable Commitments.

To address the challenge of antibiotic resistance (ABR), the international community must ensure access, conservation and innovation of antibiotics. These goals can be significantly advanced through ten global policies that have been recommended to form part of an international legal agreement. Policies that could be central to this agreement include the establishment of standards, responsible antibiotic use regulations, and strengthening global surveillance systems. Funding for access, mobilizing resources for infrastructure, strengthening infection control practices, and regulating antibiotic marketing could also be helpful if included in a legal agreement. Incentives for innovation could also be included to mobilize support for its implementation. The inclusion of these policies in an international legal agreement could effectively support global collective action towards several ABR policy goals, some of which may depend on it for their achievement.

The Evolving Role of Marriage: 1950–2010

Since 1950, marriage behavior in the United States has changed dramatically. Though most men and women still marry at some point in their lives, they now do so later and are more likely to divorce. Cohabitation has become commonplace as either a precursor or an alternative to marriage, and a growing fraction of births take place outside marriage. We’ve seen a retreat from marriage within all racial and ethnic groups and across the socioeconomic spectrum. But the decoupling of marriage and parenthood has been much less prevalent among college graduates. Why are college graduates such a prominent exception? Some scholars argue that marriage has declined furthest in low-income communities because men with less education have seen their economic prospects steadily diminish, and because welfare and other social programs have let women rear children on their own. Others contend that poor women have adopted middle-class aspirations for marriage, leading them to establish unrealistic economic prerequisites. The problem with these explanations, write Shelly Lundberg and Robert Pollak, is that they focus on barriers to marriage only in very poor communities. Yet we’ve seen a retreat from marriage among a much broader swath of the population. Lundberg and Pollak argue that the sources of gains from marriage have changed in such a way that families with high incomes and high levels of education have the greatest incentives to maintain long-term relationships. As women’s educational attainment has overtaken that of men, and as the ratio of men’s to women’s wages has fallen, they write, traditional patterns of gender specialization in household and market work have weakened. The primary source of gains from marriage has shifted from production of household services to investment in children. For couples whose resources allow them to invest intensively in their children, marriage provides a commitment mechanism that supports such investment. For couples who lack the resources to invest intensively in their children, on the other hand, marriage may not be worth the cost of limited independence and potential mismatch.

Is Cross‐Listing a Commitment Mechanism?: The Choice of Destinations and Family Ownership

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper examines whether firms choose destinations with stronger investor protection than those provided in their respective home markets after controlling for both firm‐specific and destination‐specific characteristics that affect the choice of cross‐listing destination.Research Findings/InsightsUsing data on cross‐listing decisions of firms from 28 home countries targeted toward nine destinations for the 1994–2008 period, we find that firms are more likely to cross‐list in foreign markets that are less protective of outside investors relative to the home country once we simultaneously control for relevant destination‐specific and firm‐specific characteristics. Such preference for weak protection is mostly driven by family firms, but not observed among non‐family firms.Theoretical/Academic ImplicationsThese results suggest that the widely accepted “bonding” hypothesis, which posits that firms which cross‐list in order to voluntarily commit themselves to higher disclosure standards, should be interpreted with caution. Rather, controlling families may choose to list in destinations with weaker protection to retain their private benefits.Practitioner/Policy ImplicationsThe findings imply that exchanges in countries with stronger investor protection may not be attractive for potential foreign clientele, especially firms controlled by families. To increase foreign listings in a given exchange, regulators should consider not only the benefits of tight regulations such as “bonding,” but also their compliance costs.

A Commitment Mechanism to Eliminate Willful Contract Litigation

This paper concerns companies that sell commodities and are in their initial stages of formation and growth. Such companies will often face severe difficulties due to the banking system's unwillingness to finance their activities before they are able to develop sufficient credit histories. When faced with a loss contract, such a company may prefer to breach and litigate simply in order to gain time before having to pay off its debt, thereby preventing immediate insolvency. We have designed a new financial tool to eliminate this incentive to willfully litigate. Under this mechanism, the seller undertakes an obligation to pay a bank the amount of the buyer's damages if the seller does not deliver the good on delivery day in accordance with the contract and law. The bank, in turn, undertakes to pay the buyer the amount of her damages if received by the bank. The effect of this mechanism is to shift the buyer's entitlement to the bank. This increases the seller's cost of willful litigation: if the seller chooses to breach he will prefer paying the buyer's damages to the bank in order to avoid any indication of default on the bank's records, since such an indication will affect his credit rating and access to financial markets in the future. In addition, the mechanism gives the seller an incentive to breach the contract if and only if the contract becomes ex-post inefficient. We also demonstrate ex-ante benefits from the mechanism: by eliminating the risk of willful litigation, established buyers may be willing to raise the contract price, thereby increasing the probability of newcomers’ survival. The mechanism also enables the banking system to screen new companies according to their quality, and use their contracts as collateral. Ultimately, this can result in the newcomer achieving financial stability earlier.

Do investors value SEO lockup agreements?

The lockup is an agreement between issuing firms and underwriting investment bankers that prohibits firm insiders from selling shares prior to lockup expiry. Using a manually corrected sample of 7546 SEOs between 1988 and 2007, this study investigates the role of these agreements by separately examining the valuation of primary and secondary market investors. Reported evidence shows that announcement day returns increase with the presence and length of lockup, which suggests that secondary market investors value lockups positively. Tests on the SEO discount provide no evidence that primary market investors value lockups. Long-term performance tests also reveal no evidence that lockup SEOs have superior quality. These findings are consistent with the commitment device hypothesis, stating that lockups serve as a commitment mechanism to ameliorate moral hazard issues.

Uncovering Collateral Constraints

Collateral plays two roles. It may be used as an ex-ante commitment mechanism against agency risk or for hedging expected default risk. Using cross-country loan level data, we find that the commitment motive alone explains collateralization. Going from the lowest to highest quartile of ex-ante agency risk distribution increases initial collateralization by 11 percentage points, controlling for the supply of collateral, but the same change in default risk leads to no change in collateralization. We also uncover a collateral “pecking order” driven solely by commitment concerns. While the bank is willing to accept firm-specific assets susceptible to agency risk for low agency risk firms, it prefers non-specific assets for firms prone to agency risk. We find that information environments with institutions such as credit registries and objective rating criteria increase rating precision, and show that our results are not a consequence of rating imprecision.