Moral hazard and overlapping generations with endogenous occupational choice
AbstractThis paper introduces a general equilibrium, overlapping generations model of the principal- agent problem. Bargaining power, occupational choice, and the returns to each occupation are endogenous. Individuals live for two periods and must work when young. When old, they have a choice between becoming principals or remaining agents. Successful workers are paid high wages and may become self financed principals when old; unsuccessful workers are paid low wages and can become principals only by borrowing money. In a “high wage” equilibrium, an imperfect credit market (which makes it costly to borrow money due to, for example, moral hazard between lender and borrower) mitigates the moral hazard problem on the labor market: young workers work harder than in the static model (for a given wage) in order to succeed and become self-financed principals (the “American Dream” effect). The extra effort makes it possible for principals to pay high wages. However, there is a coordination problem. For the same parameter values that give rise to the “high wage” equilibrium, there also exist equilibria where wages are so low that even successful agents need to borrow money if they are to become principals. Effort is then low because wages are low, and because there is no “American Dream”.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1997028.
Date of creation: 01 Apr 1997
Date of revision:
Contact details of provider:
Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
Moral Hazard; Overlapping Generations; Occupational Choice; Bargaining Power; Credit Market Imperfections; American Dream;
Find related papers by JEL classification:
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS).
If references are entirely missing, you can add them using this form.