Self-Enforcing Contracts with Persistence

Martin Dumav, William Fuchs and Jangwoo Lee

No 16888, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show theoretically that, in the presence of persistent productivity shocks, the reliance on selfenforcing contracts due to limited legal enforcement may provide a possible rationale why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality. We also provide suggestive empirical evidence consistent with the model’s aggregate implications. Finally, we relate the model’s firm-level implications to existing empirical findings.

Keywords: Dynamic moral hazard; Productivity; Relational contracts; Persistence; Limited commitment (search for similar items in EconPapers)
JEL-codes: C73 D24 D82 D86 E24 L14 (search for similar items in EconPapers)
Date: 2022-01
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Journal Article: Self-enforcing contracts with persistence (2022)
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