Self-Enforcing Contracts with Persistence

69 Pages Posted: 4 Feb 2022

See all articles by Martin Dumav

Martin Dumav

Universidad Carlos III

William Fuchs

University of Texas at Austin - Department of Finance; Charles III University of Madrid - Department of Economics

Jangwoo Lee

The Chinese University of Hong Kong (CUHK)

Date Written: January 1, 2022

Abstract

We show theoretically that, in the presence of persistent productivity shocks, the reliance on self-enforcing contracts due to limited legal enforcement may provide a possible rationale why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality. We also provide suggestive empirical evidence consistent with the model’s aggregate implications. Finally, we relate the model’s firm-level implications to existing empirical findings.

Keywords: Dynamic moral hazard, Limited Commitment, Persistence, productivity, Relational Contracts

JEL Classification: C73, D24, D82, D86, E24, L14

Suggested Citation

Dumav, Martin and Fuchs, William Martin and Lee, Jangwoo, Self-Enforcing Contracts with Persistence (January 1, 2022). CEPR Discussion Paper No. DP16888, Available at SSRN: https://ssrn.com/abstract=4026775

Martin Dumav (Contact Author)

Universidad Carlos III ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

William Martin Fuchs

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Charles III University of Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Jangwoo Lee

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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