Relationships and Growth
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 to demonstrate 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 (self-enforcing agreement) in the endogenous process of economic development. In particular we show that relational contracting fosters the emergence of the market-based economy in low development stages but its role declines as the economy grows and enters high development stages.
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|Date of creation:||Nov 2011|
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