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Time is on my side: relational contracts and aggregate welfare

Author

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  • Bohdan Kukharskyy
  • Michael Pflüger

Abstract

This paper develops a simple general equilibrium model which establishes a link between the patience of economic agents and the well-being of nations. We show that firms in long-term oriented countries can mitigate hold-up inefficiencies by engaging with their suppliers in relational contracting—informal agreements sustained by the value of future relationships. Our model predicts that countries with a higher level of patience will exhibit greater economic well-being and higher total factor productivity. We provide empirical evidence in line with the predictions of our theory.

Suggested Citation

  • Bohdan Kukharskyy & Michael Pflüger, 2019. "Time is on my side: relational contracts and aggregate welfare," Oxford Economic Papers, Oxford University Press, vol. 71(3), pages 709-732.
    • Handle: RePEc:oup:oxecpp:v:71:y:2019:i:3:p:709-732.
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    File URL: http://hdl.handle.net/10.1093/oep/gpy044
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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