Dynamic Relational Contracts with Consumption Constraints

Jonathan Thomas and Timothy Worrall

No KERP 2007/16, Keele Economics Research Papers from Centre for Economic Research, Keele University

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; relational contracts; self-enforcement. (search for similar items in EconPapers)
JEL-codes: C61 C73 D74 D92 L22 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-12
New Economics Papers: this item is included in nep-gth
Note: The authors 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 and Francisco Gonzalez for helpful comments. An earlier version of this paper had the title "Self-enforcing contracts with action dynamics".
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Working Paper: Dynamic Relational Contracts with Consumption Constraints (2008)
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