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Relational Contracts and the Economic Well-Being of Nations

Author

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  • Bohdan Kukharskyy
  • Michael Pflüger

Abstract

Informal long-term relationships and mutual confidence play a crucial role in modern economies in at least two dimensions. First, the performance of firms is strongly affected by their capacity to solve organizational questions effectively and this capacity is apparently strongly related to their ability to maintain informal long-term relationships. Second, countries that are better at maintaining unwritten agreements and where interactions are more strongly guided by a sense of trust fare better in terms of economic welfare than others. This paper provides a simple general equilibrium model which reconciles these two findings: we offer a micro-founded explanation of how the trust that prevails in an economy gets transmitted into higher economic well-being and we thereby highlight the role of managers with low time preference. Our analysis builds on the model of Antràs and Helpman (2004) and a formalization of the notion of relational contracting developed in Baker, Gibbons and Murphy (2002).

Suggested Citation

  • Bohdan Kukharskyy & Michael Pflüger, 2011. "Relational Contracts and the Economic Well-Being of Nations," Working Papers 095, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:095_kukharskyypflueger
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    References listed on IDEAS

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    More about this item

    Keywords

    aggregate welfare; theory of the firm; relational contracting; firm heterogeneity;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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