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Relationships and Growth

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  • Shingo Ishiguro

    ()
    (Graduate School of Economics, Osaka University)

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    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 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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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1131R.pdf
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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-Rev.

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    Length: 70 pages
    Date of creation: Nov 2011
    Date of revision: May 2013
    Handle: RePEc:osk:wpaper:1131r

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: dynamic general equilibrium; economic development; armfs length contract; relational contract;

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    1. Karsten Jeske, 2006. "Private International Debt with Risk of Repudiation," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 576-593, June.
    2. Maurer, Noel & Haber, Stephen, 2007. "Related Lending and Economic Performance: Evidence from Mexico," The Journal of Economic History, Cambridge University Press, vol. 67(03), pages 551-581, September.
    3. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
    4. Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
    5. 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.
    6. 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.
    7. Bidner, Chris & Francois, Patrick, 2009. "Cultivating Trust: Norms, Institutions and the Implications of Scale," Economics working papers patrick_francois-2009-66, Vancouver School of Economics, revised 02 Dec 2009.
    8. 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.
    9. Hideshi Itoh & Hodaka Morita, 2006. "Formal Contracts, Relational Contracts, and the Holdup Problem," CESifo Working Paper Series 1786, CESifo Group Munich.
    10. Allen, Robert C., 2011. "Global Economic History: A Very Short Introduction," OUP Catalogue, Oxford University Press, number 9780199596652, October.
    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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