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Relationships and Growth

  • Shingo Ishiguro

    ()

    (Graduate School of Economics, Osaka University)

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    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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    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
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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    1. 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.
    2. Chris Bidner & Patrick Francois, 2011. "Cultivating Trust: Norms, Institutions and the Implications of Scale," Economic Journal, Royal Economic Society, vol. 121(555), pages 1097-1129, 09.
    3. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
    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, 2006. "Development and the interaction of enforcement institutions," Policy Research Working Paper Series 4090, The World Bank.
    6. 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.
    7. 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.
    8. 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.
    9. Allen, Robert C., 2011. "Global Economic History: A Very Short Introduction," OUP Catalogue, Oxford University Press, number 9780199596652, March.
    10. 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, October.
    11. Hideshi Itoh & Hodaka Morita, 2006. "Formal Contracts, Relational Contracts, and the Holdup Problem," CESifo Working Paper Series 1786, CESifo Group Munich.
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