Working Paper: CEPR ID: DP16888
Authors: Martin Dumav; William Fuchs; Jangwoo Lee
Abstract: We show theoretically that, in the presence of persistent productivity shocks, the reliance on selfenforcingcontracts due to limited legal enforcement may provide a possible rationale why countrieswith the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersionof firm-level productivity, and (iii) greater wage inequality. We also provide suggestive empiricalevidence consistent with the model’s aggregate implications. Finally, we relate the model’s firm-levelimplications to existing empirical findings.
Keywords: dynamic moral hazard; productivity; relational contracts; persistence; limited commitment
JEL Codes: C73; D24; D82; D86; E24; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weaker enforcement (P14) | higher aggregate TFP volatility (O49) |
| weaker enforcement (P14) | larger dispersion of firm-level productivity (D29) |
| weaker enforcement (P14) | greater wage inequality (J31) |