Self-enforcing contracts with persistence

Martin Dumav, William Fuchs and Jangwoo Lee

Journal of Monetary Economics, 2022, vol. 128, issue C, 72-87

Abstract: We show theoretically that, in the presence of persistent productivity shocks, the reliance on self-enforcing 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
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Working Paper: Self-Enforcing Contracts with Persistence (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:128:y:2022:i:c:p:72-87

DOI: 10.1016/j.jmoneco.2022.03.010

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