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Dynamic Relational Contracts with Consumption Constraints

Author

Listed:
  • Jonathan P Thomas

    (Economics, University of Edinburgh)

  • Tim Worrall

    (Economics, Keele University)

Abstract

This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.

Suggested Citation

  • Jonathan P Thomas & Tim Worrall, 2007. "Dynamic Relational Contracts with Consumption Constraints," Keele Economics Research Papers KERP 2007/16, Centre for Economic Research, Keele University.
    • Handle: RePEc:kee:kerpuk:2007/16
    Note: The authors gratefully acknowledge the financial support of the Economic and Social Research Council (Research Grant: RES-000-23-0865). We also thank in particular Pierre Dubois and Francisco Gonzalez for helpful comments. An earlier version of this paper had the title "Self-enforcing contracts with action dynamics".
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0716.pdf
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    References listed on IDEAS

    as
    1. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
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    More about this item

    Keywords

    Consumption constraints; relational contracts; self-enforcement.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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