Dynamic Relational Contracts with Credit Constraints

52 Pages Posted: 5 May 2010

See all articles by Jonathan Thomas

Jonathan Thomas

University of Edinburgh - Economics; CESifo (Center for Economic Studies and Ifo Institute)

Tim S. Worrall

University of Edinburgh

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

Thomas, Jonathan P. and Worrall, Tim S., Dynamic Relational Contracts with Credit Constraints (March 31, 2010). Available at SSRN: https://ssrn.com/abstract=1599525 or http://dx.doi.org/10.2139/ssrn.1599525

Jonathan P. Thomas

University of Edinburgh - Economics ( email )

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HOME PAGE: http://www.st-andrews.ac.uk/~jpt/

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679

HOME PAGE: http://www.cesifo.de

Tim S. Worrall (Contact Author)

University of Edinburgh ( email )

30 Buccleuch Place
Edinburgh, Scotland EH8 9JY
United Kingdom
(0)131 651 5128 (Phone)

HOME PAGE: http://www.timworrall.com

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