Time is on My Side: Relational Contracts and Aggregate Welfare
39 Pages Posted: 2 Apr 2018
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
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