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The Non-Convexity Issues in a Limited-Commitment Economy

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  • Christian Calmès

    ()
    (Département des sciences administratives, Université du Québec (Outaouais), et LRSP)

  • Raymond Théoret

    ()
    (Département de stratégie des affaires, Université du Québec (Montréal), et Chaire d'information financière et organisationnelle)

Abstract

After reviewing some basic self-enforcing labour contracts models, we expose how self-enforcing labour market theory can help explain some important dynamic properties of key macroeconomic variables. Calmès (1999, 2003) detail how self-enforcing labour contracts improve the way macroeconomic models account for the response of the economy to external shocks. The introduction of a state-dependent outside opportunity for the manager is the first step in generalizing the theory (Calmès 2007, Thomas and Worrall 2007). In this paper, we discuss the next step, the endogenization of capital. Although desirable, this task is not straightforward as the contract set might no longer be compact in this case. Relatedly, we also discuss the introduction of a third agent (the financial intermediary) in the model. We also analyse the link between stationarity and set convexity when incorporating growth in the model. A stochastic trend may be considered but then the non-convexity issue arises again. The aggregation of heterogeneous individual contracts can also lead to the same problem.

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File URL: http://www.repad.org/ca/qc/uq/uqam/clsthtLC082008.pdf
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Bibliographic Info

Paper provided by Département des sciences administratives, UQO in its series RePAd Working Paper Series with number UQO-DSA-wp012009.

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Length: 41 pages
Date of creation: 05 Jan 2009
Date of revision:
Handle: RePEc:pqs:wpaper:012009

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Keywords: Internal propagation mechanisms; Real business cycle; Self-enforcing contract; Risk-sharing hypothesis; Non-convexity.;

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References

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  1. Jean-Pierre DANTHINE & John B. DONALDSON, 1991. "Risk Sharing in the Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9109, Université de Lausanne, Faculté des HEC, DEEP.
  2. Christian Calmès, 2007. "Self-Enforcing Labour Contracts and Macroeconomic Dynamics," International Advances in Economic Research, Springer, vol. 13(2), pages 200-213, May.
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  18. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  19. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
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