Dynamic Relational Contracts with Credit Constraints
52 Pages Posted: 5 May 2010
Date Written: March 31, 2010
This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.
Keywords: Credit constraints, relational contracts, self-enforcement, limited commitment
JEL Classification: C61, C73, D86, D91, L14
Suggested Citation: Suggested Citation