Question

Briefly explain the concept of "Credible Commitment"

Answer 1

Credible Commitment is a modern concept which is applied in every sphere of human lives such as economics, politics, business, international relationship, social interactions etc. It stresses on the importance of commitments being credible, that it should be communicated and understood to be valuable. Commitment has temporal dimensions and is binding, therefore, people involved in such interactions must stand committed to the made agreements even in the future ( Coyne and Boettke, 2009). For example, there has been a business agreement between two companies i.e. Company A and Company B. Company A is a spare parts provider and promised to deliver 5000 headlights to company B within a period of 3 months. However, they could not fulfil the promise due to some management problems within the company. This in turn affected company B as it affected their delivery of cars. If Company B would have known that this problem would have risen, they would never have made a deal with company A. As a result, company A loses its credibility and might not be able to get business deals with company B in the future unless some rectifications or solutions come up.

Reference: CHRISTOPHER J. COYNE & PETER J. BOETTKE (2009), “ The problem of credible commitment in reconstruction”, Journal of Institutional Economics 5: 1, 1–23.