Commitment and observability in a contracting environment

This paper examines leader-follower games where a leader must purchase an essential input from a price-setting supplier in order to take an action. We show that equilibrium outcomes when the followers perfectly observe the leaders’actions cannot be approximated by mixed equilibrium outcomes of the game where followers imperfectly observe the leaders’actions, i.e. they are not accessible. Accessibility fails since in a pure strategy equilibrium, a supplier makes positive pro…ts; however in an equilibrium where a leader randomizes, supplier pro…ts must be zero. Our result follows from a generalized indi¤erence principle that mixed strategies must satisfy in economic environments. While supplier pro…ts cannot be approximated, player action pro…les are accessible. Our results also apply to games with costly observation. JEL Code: C73.