Self-Enforcing Contracts with Persistence
69 Pages Posted: 4 Feb 2022
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: Suggested Citation