Relational Contracts and the Economic Well-Being of Nations

48 Pages Posted: 27 Dec 2010

See all articles by Bohdan Kukharskyy

Bohdan Kukharskyy

City University of New York (CUNY)

Michael Pflüger

University of Passau; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)


Informal long-term relationships and mutual confidence play a crucial role in modern economies in at least two dimensions. First, the performance of firms is strongly affected by their capacity to solve organizational questions effectively and this capacity is apparently strongly related to their ability to maintain informal long-term relationships. Second, countries that are better at maintaining unwritten agreements and where interactions are more strongly guided by a sense of trust fare better in terms of economic welfare than others. This paper provides a simple general equilibrium model which reconciles these two findings: we offer a micro-founded explanation of how the trust that prevails in an economy gets transmitted into higher economic well-being and we thereby highlight the role of managers with low time preference. Our analysis builds on the model of Antràs and Helpman (2004) and a formalization of the notion of relational contracting developed in Baker, Gibbons and Murphy (2002).

Keywords: relational contracting, theory of the firm, aggregate welfare, firm heterogeneity

JEL Classification: D23, F14, L14, L22

Suggested Citation

Kukharskyy, Bohdan and Pflüger, Michael, Relational Contracts and the Economic Well-Being of Nations. IZA Discussion Paper No. 5394, Available at SSRN: or

Bohdan Kukharskyy (Contact Author)

City University of New York (CUNY) ( email )

695 Park Avenue
New York, NY 10021
United States

Michael Pflüger

University of Passau ( email )

Innstrasse 27
Passau, 94032

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

German Institute for Economic Research (DIW Berlin)

Mohrenstrasse 58
Berlin, 10117

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