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Uncertainty, Investment and Productivity with Relational Contracts

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  • James M Malcomson

Abstract

With relational contracts, increased uncertainty with no change in factor prices is shown to reduce investment in the long run even if the parties are risk-neutral. This contrasts with models based on the impact of financial risk on the cost of capital and on the option value arising from irreversible investment. For the latter, Bloom et al. (Econometrica, 2018) find that a negative first-moment shock, in addition to increased uncertainty, best matches the data. This paper develops a relational contract model to demonstrate the impact of uncertainty on investment, depending on whether investment is general or specific. It then uses a specification calibrated with parameters from Bloom et al. (Econometrica, 2018) to show that this model can generate effects on productivity and investment of the magnitude of the negative aggregate shock in that paper purely with an increase in uncertainty.

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  • James M Malcomson, 2024. "Uncertainty, Investment and Productivity with Relational Contracts," Journal of the European Economic Association, European Economic Association, vol. 22(3), pages 1139-1176.
    • Handle: RePEc:oup:jeurec:v:22:y:2024:i:3:p:1139-1176.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvad048
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    References listed on IDEAS

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    1. Matthias Fahn & Valeria Merlo & Georg Wamser, 2017. "Relational Contracts, the Cost of Enforcing Formal Contracts, and Capital Structure Choice - Theory and Evidence," CESifo Working Paper Series 6562, CESifo.
    2. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, December.
    5. Gary S. Becker, 1975. "Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, Second Edition," NBER Books, National Bureau of Economic Research, Inc, number beck75-1.
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    Cited by:

    1. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    2. Francesc Dilmé & Daniel F. Garrett, 2023. "Relational Contracts: Public versus Private Savings," Econometrica, Econometric Society, vol. 91(3), pages 1025-1075, May.

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