Time is on My Side: Relational Contracts and Aggregate Welfare

39 Pages Posted: 2 Apr 2018

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)


This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting – informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. We provide empirical evidence in line with the predictions of our theory.

Keywords: time preferences, relational contracting, aggregate welfare, TFP

JEL Classification: D23, L14, L22, L23, O10

Suggested Citation

Kukharskyy, Bohdan and Pflüger, Michael, Time is on My Side: Relational Contracts and Aggregate Welfare. IZA Discussion Paper No. 11387, Available at SSRN: https://ssrn.com/abstract=3153351 or http://dx.doi.org/10.2139/ssrn.3153351

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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