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Time Is on My Side: Relational Contracts and Aggregate Welfare

Bohdan Kukharskyy () and Michael P. Pflüger ()
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Bohdan Kukharskyy: University of Passau
Michael P. Pflüger: University of Würzburg

No 11387, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting – informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. We provide empirical evidence in line with the predictions of our theory.

Keywords: time preferences; relational contracting; aggregate welfare; TFP (search for similar items in EconPapers)
JEL-codes: D23 L14 L22 L23 O10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta
Date: 2018-03
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Forthcoming in: Oxford Economic Papers, 2019

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