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Dynamic Relational Contracts with Credit Constraints

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Author Info

  • Jonathan P Thomas

    ()
    (School of Economics, The University of Edinburgh)

  • Tim Worrall

    ()
    (Economics, School of Social Sciences, 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.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/economics/discussionpapers/EDP-1009.pdf
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Bibliographic Info

Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1009.

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Length: 45 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:man:sespap:1009

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.
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/
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Keywords: Consumption constraints; limited commitment; relational contracts; self-enforcement.;

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References

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  1. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 651-697.
  2. Mark Aguiar & Manuel Amador & Gita Gopinath, 2007. "Investment Cycles and Sovereign Debt Overhang," NBER Working Papers 13353, National Bureau of Economic Research, Inc.
  3. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Mechanisms," Econometrica, Econometric Society, vol. 76(3), pages 619-641, 05.
  4. Thomas, J. & Worrall, T., 1991. "Foreign direct investment and the risk of expropriation," Discussion Paper 1991-26, Tilburg University, Center for Economic Research.
  5. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 209-44, January.
  6. Katherine Doornik, 2006. "Relational Contracting in Partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 517-548, 06.
  7. Luis Rayo, 2007. "Relational Incentives and Moral Hazard in Teams," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 937-963.
  8. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  9. Maija Halonen, 2002. "Reputation And The Allocation Of Ownership," Economic Journal, Royal Economic Society, vol. 112(481), pages 539-558, July.
  10. Rui Albuquerque & Hugo Hopenhayn, 2002. "Optimal Lending Contracts and Firm Dynamics," RCER Working Papers 493, University of Rochester - Center for Economic Research (RCER).
  11. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  12. Erwan Quintin, 2008. "Contract enforcement and the size of the informal economy," Economic Theory, Springer, vol. 37(3), pages 395-416, December.
  13. Thomas Cooley & Ramon Marimon & Vicenzo Quadrini, 1999. "Aggregate consequences of limited contract enforceability," Economics Working Papers 843, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2003.
  14. Debraj Ray, 2002. "The Time Structure of Self-Enforcing Agreements," Econometrica, Econometric Society, vol. 70(2), pages 547-582, March.
  15. Garvey, Gerald T., 1995. "Why reputation favors joint ventures over vertical and horizontal integration A simple model," Journal of Economic Behavior & Organization, Elsevier, vol. 28(3), pages 387-397, December.
  16. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 595-609, October.
  17. Nicola Pavoni, 2009. "Optimal Unemployment Insurance, With Human Capital Depreciation, And Duration Dependence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 323-362, 05.
  18. Simon Board, 2011. "Relational Contracts and the Value of Loyalty," American Economic Review, American Economic Association, vol. 101(7), pages 3349-67, December.
  19. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  20. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
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Citations

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Cited by:
  1. James M. Malcomson, 2012. "Relational Incentive Contracts
    [The Handbook of Organizational Economics]
    ," Introductory Chapters, Princeton University Press.
  2. Meier, Volker & Rainer, Helmut, 2012. "On the optimality of joint taxation for noncooperative couples," Labour Economics, Elsevier, vol. 19(4), pages 633-641.

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