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Self-enforcing contracts with persistence
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DOI：10.1016/j.jmoneco.2022.03.010.png)
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Abstract
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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. (C) 2022 The Authors. Published by Elsevier B.V.
Keywords:
Dynamic moral hazard
Productivity
Relational contracts
Persistence
Limited commitment
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