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The Non-Convexity Issues in a Limited-Commitment Economy

Author

Listed:
  • 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.

Suggested Citation

  • Christian Calmès & Raymond Théoret, 2009. "The Non-Convexity Issues in a Limited-Commitment Economy," RePAd Working Paper Series UQO-DSA-wp012009, Département des sciences administratives, UQO.
  • Handle: RePEc:pqs:wpaper:012009
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    File URL: http://www.repad.org/ca/qc/uq/uqam/clsthtLC082008.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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