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Why Are Capitalists the Bosses?

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  • Eswaran, Mukesh
  • Kotwal, Ashok

Abstract

This paper addresses the question: why does capital typically hire labor rather than the other way around? It models a situation in which a capitalist (owner of money capital) can choose between lending out his capital for production and using it to set up production under his own supervision. It is demonstrated that the moral hazard of potential borrowers, on account of limited liability, provides the capitalist with the incentive to become a firm-owner, supervising hired labor. The capitalist's choice is endogenized in terms of his opportunity cost of time. It is argued that moral hazard, with respect to the use of borrowed capital, is an important determinant of the social hierarchy in the workplace. Copyright 1989 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 394 (March)
Pages: 162-76

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:394:p:162-76

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Cited by:
  1. Frederic Zimmerman & MICHAEL R. CARTER, . "Asset Smoothing, Consumption Smoothing and the Reproduction for Inequality under Risk and Subsistence Constraints," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 402, Wisconsin-Madison Agricultural and Applied Economics Department.
  2. Gregory Dow, 2001. "Allocating Control over Firms: Stock Markets versus Membership Markets," Review of Industrial Organization, Springer, vol. 18(2), pages 201-218, March.
  3. Roumasset, J., 1995. "The nature of the agricultural firm," Journal of Economic Behavior & Organization, Elsevier, vol. 26(2), pages 161-177, March.
  4. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  5. Carter, Michael R. & Zimmerman, Frederick J., 2000. "The dynamic cost and persistence of asset inequality in an agrarian economy," Journal of Development Economics, Elsevier, vol. 63(2), pages 265-302, December.
  6. Andrew F. Newman, 1991. "The Capital Market," Discussion Papers 951, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Stefan Grosse & Louis Putterman & Bettina Rockenbach, 2007. "Monitoring In Teams: A Model and Experiment on the Central Monitor Hypothesis," Working Papers 2007-4, Brown University, Department of Economics.

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