Dynamic Relational Contracts with Credit Constraints

Jonathan Thomas and Timothy Worrall

No 1009, Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.

Keywords: Consumption constraints; limited commitment; relational contracts; self-enforcement. (search for similar items in EconPapers)
JEL-codes: C61 C73 D86 D91 L14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2010-04
New Economics Papers: this item is included in nep-bec and nep-cta
Note: We gratefully acknowledge the financial support of the Economic and Social Research Council (Research Grant: RES-000-23-0865). We also thank in particular Pierre Dubois, Francisco Gonzalez, Bruno Jullien and John Moore for helpful comments. An earlier version of this paper had the title ``Self-enforcing contracts with action dynamics''. The second author gratefully acknowledges the support of the Hallsworth Research Fellowship Fund at the University of Manchester.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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