Relationships and Growth
AbstractIn 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 that it demonstrates 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 in the endogenous process of economic development. In particular, we show that relational contracting fosters the emergence of a 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 InfoPaper 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-Rev.
Length: 70 pages
Date of creation: Nov 2011
Date of revision: May 2013
dynamic general equilibrium; economic development; armfs length contract; relational contract;
Find related papers by JEL classification:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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