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Occupational choice, incentives and wealth distribution

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  • Chakraborty, Archishman
  • Citanna, Alessandro

Abstract

We consider a model of endogenous occupational choice in economies with a continuum of individuals who differ in their endowments. Individuals have a choice of remaining self-employed or engaging in productive matches with another individual, i.e., forming firms. Matches are subject to a moral hazard problem with limited liability constraints. We suppose that the division of the gains from such matches is endogenous and determined by competitive market forces. We characterize the equilibrium matching patterns as a function of the nature (symmetry) of the underlying incentive problem within a firm. We give necessary and sufficient conditions for "segregation" (wealth-homogeneous firms) to occur in equilibrium. We show that the equilibrium distributions of occupations, utilities and surplus typically depend on the distribution of wealth in the economy, possibly in nonmonotonic ways. We study the "trickle down" effects of taxation. We show how financial markets imperfections or matching restrictions may restore segregation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 122 (2005)
Issue (Month): 2 (June)
Pages: 206-224

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Handle: RePEc:eee:jetheo:v:122:y:2005:i:2:p:206-224

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Web page: http://www.elsevier.com/locate/inca/622869

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  1. Patrick Legros & Andrew Newman, 2002. "Monotone matching in perfect and imperfect worlds," ULB Institutional Repository 2013/7032, ULB -- Universite Libre de Bruxelles.
  2. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  3. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  4. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  5. Harold L Cole & Edward C Prescott, 1997. "Valuation equilibrium with Clubs," Levine's Working Paper Archive 912, David K. Levine.
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  7. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
  8. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation by Skill," NBER Working Papers 5718, National Bureau of Economic Research, Inc.
  9. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Richard E. Kihlstrom & Jean-Jacques Laffont, . "A Competitive Entrepreneurial Model of a Stock Market," Rodney L. White Center for Financial Research Working Papers 02-80, Wharton School Rodney L. White Center for Financial Research.
  11. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
  12. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
  13. Kaneko, Mamoru & Wooders, Myrna Holtz, 1986. "The core of a game with a continuum of players and finite coalitions: The model and some results," Mathematical Social Sciences, Elsevier, vol. 12(2), pages 105-137, October.
  14. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  15. Becker, Gary S, 1974. "A Theory of Marriage: Part II," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages S11-S26, Part II, .
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Cited by:
  1. Mette Ejrnæs & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  2. Ghatak, Maitreesh & Karaivanov, Alexander, 2011. "Contractual Structure and Endogenous Matching in Partnerships," CEPR Discussion Papers 8298, C.E.P.R. Discussion Papers.

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