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Time Is on My Side: Relational Contracts and Aggregate Welfare

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Listed:
  • Kukharskyy, Bohdan

    () (University of Passau)

  • Pflüger, Michael P.

    () (University of Würzburg)

Abstract

This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting – informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. We provide empirical evidence in line with the predictions of our theory.

Suggested Citation

  • Kukharskyy, Bohdan & Pflüger, Michael P., 2018. "Time Is on My Side: Relational Contracts and Aggregate Welfare," IZA Discussion Papers 11387, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11387
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    More about this item

    Keywords

    time preferences; relational contracting; aggregate welfare; TFP;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • 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
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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