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Dynamic Relational Contracts with Credit Constraints

Author

Listed:
  • Jonathan P Thomas

    (School of Economics, The University of Edinburgh)

  • Tim Worrall

    (Economics, School of Social Sciences, University of Manchester)

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, 2010. "Dynamic Relational Contracts with Credit Constraints," Economics Discussion Paper Series 1009, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:1009
    Note: We 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, Francisco Gonzalez, Bruno Jullien and John Moore for helpful comments. An earlier version of this paper had the title ``Self-enforcing contracts with action dynamics''. The second author gratefully acknowledges the support of the Hallsworth Research Fellowship Fund at the University of Manchester.
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    File URL: https://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-1009.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

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    2. Fong, Yuk-fai & Li, Jin, 2017. "Relational contracts, limited liability, and employment dynamics," Journal of Economic Theory, Elsevier, vol. 169(C), pages 270-293.
    3. Meier, Volker & Rainer, Helmut, 2012. "On the optimality of joint taxation for noncooperative couples," Labour Economics, Elsevier, vol. 19(4), pages 633-641.
    4. James M. Malcomson, 2012. "Relational Incentive Contracts [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    5. Huanxing Yang, 2013. "Nonstationary Relational Contracts With Adverse Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 525-547, May.
    6. Ales, Laurence & Maziero, Pricila & Yared, Pierre, 2014. "A theory of political and economic cycles," Journal of Economic Theory, Elsevier, vol. 153(C), pages 224-251.
    7. Suehyun Kwon, 2016. "Relational contracts in a persistent environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(1), pages 183-205, January.

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    More about this item

    Keywords

    Consumption constraints; limited commitment; 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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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