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Relationships and Growth

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  • Shingo Ishiguro

    ()
    (Graduate School of Economics, Osaka University)

Abstract

In this paper we present a dynamic general equilibrium model to investigate how different contracting modes based on formal and relational enforcements endogenously emerge and are dynamically linked with the process of economic development. Formal contracts are enforced by third party institutions (courts), while relational contracts are self-enforcing agreements without any third party involvement. The novel feature of our model is to demonstrate the co-evolution of these different enforcement modes and market equilibrium conditions, all of which are jointly determined. We then characterize the equilibrium paths of such dynamic processes and show the time structure of relational contracting (self-enforcing agreement) in the endogenous process of economic development. In particular we show that relational contracting fosters the emergence of the market-based economy in low development stages but its role declines as the economy grows and enters high development stages.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 11-31.

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Length: 53 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:osk:wpaper:1131

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Web page: http://www.econ.osaka-u.ac.jp/
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Keywords: dynamic general equilibrium; economic development; armfs length contract; relational contract;

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  1. Patrick Francois & Joanne Roberts, 2003. "Contracting Productivity Growth," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 59-85.
  2. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  3. McMillan, John & Woodruff, Christopher, 1998. "Inter-Firm Relationships and Informal Credit in Vietnam," CEPR Discussion Papers 2036, C.E.P.R. Discussion Papers.
  4. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2007. "Political Economy of Mechanisms," Working Papers CAS_RN_2007_2, Laboratory for Macroeconomic Analysis.
  5. Reyerson, Kathryn, 2006. "Institutions and the Path to the Modern Economy: Lessons from Medieval Trade. By Avner Greif. Cambridge: Cambridge University Press, 2006. Pp. xix, 503. $34.99, paper," The Journal of Economic History, Cambridge University Press, vol. 66(04), pages 1080-1081, December.
  6. Dhillon, Amrita & Rigolini, Jamele, 2011. "Development and the interaction of enforcement institutions," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 79-87, February.
  7. Naomi R. Lamoreaux, 1994. "Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England," NBER Books, National Bureau of Economic Research, Inc, number lamo94-1, May.
  8. Hideshi Itoh & Hodaka Morita, 2006. "Formal Contracts, Relational Contracts, and the Holdup Problem," CESifo Working Paper Series 1786, CESifo Group Munich.
  9. McMillan, John & Woodruff, Christopher, 1999. "Dispute Prevention without Courts in Vietnam," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 637-58, October.
  10. Asli Demirguc-Kunt & Ross Levine (ed.), 2004. "Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262541793, December.
  11. Kumar, Krishna B. & Matsusaka, John G., 2009. "From families to formal contracts: An approach to development," Journal of Development Economics, Elsevier, vol. 90(1), pages 106-119, September.
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