Uncertainty, investment and productivity with relational contracts
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 irreversib...
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| Format: | Journal article |
| Language: | English |
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Oxford University Press
2023
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| _version_ | 1811139670672670720 |
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| author | Malcomson, JM |
| author_facet | Malcomson, JM |
| author_sort | Malcomson, JM |
| collection | OXFORD |
| description | 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. (<i>Econometrica</i>, 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. (<i>Econometrica</i>, 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. |
| first_indexed | 2024-03-07T07:50:46Z |
| format | Journal article |
| id | oxford-uuid:f70167e5-2a9a-405d-8c3f-980d4e2a8a80 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-09-25T04:09:47Z |
| publishDate | 2023 |
| publisher | Oxford University Press |
| record_format | dspace |
| spelling | oxford-uuid:f70167e5-2a9a-405d-8c3f-980d4e2a8a802024-06-13T12:31:00ZUncertainty, investment and productivity with relational contractsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:f70167e5-2a9a-405d-8c3f-980d4e2a8a80EnglishSymplectic ElementsOxford University Press2023Malcomson, JMWith 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. (<i>Econometrica</i>, 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. (<i>Econometrica</i>, 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. |
| spellingShingle | Malcomson, JM Uncertainty, investment and productivity with relational contracts |
| title | Uncertainty, investment and productivity with relational contracts |
| title_full | Uncertainty, investment and productivity with relational contracts |
| title_fullStr | Uncertainty, investment and productivity with relational contracts |
| title_full_unstemmed | Uncertainty, investment and productivity with relational contracts |
| title_short | Uncertainty, investment and productivity with relational contracts |
| title_sort | uncertainty investment and productivity with relational contracts |
| work_keys_str_mv | AT malcomsonjm uncertaintyinvestmentandproductivitywithrelationalcontracts |