Discussion Paper Details

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Title: Self-Enforcing Contracts with Persistence

Author(s): Martin Dumav, William Fuchs and Jangwoo Lee

Publication Date: January 2022

Keyword(s): Dynamic moral hazard, Limited Commitment, Persistence, productivity and Relational Contracts

Programme Area(s): Industrial Organization

Abstract: We show theoretically that, in the presence of persistent productivity shocks, the reliance on selfenforcing 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.

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Bibliographic Reference

Dumav, M, Fuchs, W and Lee, J. 2022. 'Self-Enforcing Contracts with Persistence'. London, Centre for Economic Policy Research.