We consider a model of endogenous occupational choice in economies with a continuum of individuals who differ in their wealth endowments. Individuals have a choice of remaining self-employed or engaging in productive matches with other individuals, i.e., forming ``firms''. Such matches are subject to a hidden-action moral hazard problem with a limited liability constraint. This leads to wealth effects and the payoff-relvance of wealth differences across individuals. We suppose that the division of the gains from such matches is endogenous and determined by competitive market forces but that contracts are chosen optimally within matches subject to the market determined division of the gains from matching. We show, in contrast to previous results in the literature, that even when financial markets are perfect, the equilibrium distributions of occupations, utilities and surplus depend on the distribution of wealth in the economy. When financial markets are imperfect however, the equilibrium might involve the economy ``segregating'' into a high-surplus rich sector and a low-surplus poor sector, independent of the distribution of wealth in the economy. We also characterize the nature of the equilibrium as a function of financial market imperfections and also as a function of the nature (symmetry) of the underlying agency problem within a firm.
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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number
225.
Length: Date of creation: Date of revision: Handle: RePEc:cmu:gsiawp:225
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890 Web page: http://www.tepper.cmu.edu/
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999.
"Clubs and the Market,"
Econometrica,
Econometric Society, vol. 67(5), pages 1185-1218, September.
Other versions:
Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999.
"Clubs and the Market,"
Discussion Papers
99-04, University of Copenhagen. Department of Economics.
[Downloadable!]
Gary S. Becker, 1974.
"A Theory of Marriage: Part II,"
NBER Chapters,
in: Marriage, Family, Human Capital, and Fertility, pages 11-26
National Bureau of Economic Research, Inc.
[Downloadable!]
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