Self-enforcing contracts with persistence

•The paper presents a model combining two premises: (i) the reliance on self-enforcing contracts due to limited legal enforcement and (ii) persistent productivity.•The model may provide a possible rationale why countries with the worse rule of law might exhibit: (i) higher aggregate TFP volatilities, (ii) larger dispersion of firm-level productivity, and (iii) greater wage inequality.•We provide suggestive empirical evidence consistent with the model’s aggregate implications.•We relate the model’s firm-level implications to existing empirical findings.•Our model provides a unified framework to understand various phenomena at both micro and macro levels.