Size Matters - 'Over'investments in a Relational Contracting Setting

Englmaier, Florian; Fahn, Matthias

doi:10.2139/ssrn.2555539

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2023

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“…Fahn et al (2017) and Fahn et al (2019) consider the implications of relational contracts for firm capital structure. Englmaier and Fahn (2017) consider their implications for investments in liquidity-generating capital on the ability of firms to meet their financial commitments. None of these investigate the impact of uncertainty on investment of the type illustrated in Figure 1.…”

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confidence: 99%

Uncertainty, Investment and Productivity with Relational Contracts

Malcomson

2023

Journal of the European Economic Association

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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. (Econometrica, 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. (Econometrica, 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.

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Section: Related Literaturementioning

confidence: 99%

Uncertainty, Investment and Productivity with Relational Contracts

Malcomson

2023

Journal of the European Economic Association

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Size Matters - 'Over'investments in a Relational Contracting Setting

Cited by 1 publication

References 24 publications

Uncertainty, Investment and Productivity with Relational Contracts

Uncertainty, Investment and Productivity with Relational Contracts

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