Contracting with Imperfect Commitment: Minimal Canonical Contracts

Abstract

Contract theory typically assumes full commitment by the principal, but many contracts fix some payoff-relevant decisions while leaving others discretionary. We ask when imperfect commitment is equivalent to full commitment. For contracts in which a committed baseline is followed by a bounded discretionary adjustment, as in commercial-insurance schedule rating or civil penalties, bounded discretion is allocation-neutral. When contractible and non-contractible decisions are distinct instruments, the equivalence fails. We characterize optimal single-principal contracts and show that simple-offer equilibria are robust under competing principals. The methodological contribution is an extended taxation principle that makes these analyses more tractable.