Occupational choice, incentives and wealth distribution
AbstractWe 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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Bibliographic InfoPaper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 225.
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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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Other versions of this item:
- Chakraborty, Archishman & Citanna, Alessandro, 2005. "Occupational choice, incentives and wealth distribution," Journal of Economic Theory, Elsevier, vol. 122(2), pages 206-224, June.
- CITANNA, Alessandro & CHAKRABORTY, Archishman, 2001. "Occupational Choice, incentives and wealth distribution," Les Cahiers de Recherche 720, HEC Paris.
- D20 - Microeconomics - - Production and Organizations - - - General
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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