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Occupational Choice, incentives and wealth distribution

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Author Info
CITANNA, Alessandro
CHAKRABORTY, Archishman (Baruch College, CUNY, New York)

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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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Publisher Info
Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 720.

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Length: 52 pages
Date of creation: 01 Jan 2001
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Handle: RePEc:ebg:heccah:0720

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Related research
Keywords: matching; contract theory; club theory; firm formation; incomplete markets;

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Find related papers by JEL classification:
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

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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.:
  1. Edward S. Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper 00-08, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Legros, Patrick & Newman, Andrew, 2000. "Monotone Matching In Perfect And Imperfect Worlds," CEPR Discussion Papers 2396, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February. [Downloadable!] (restricted)
  8. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
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  9. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November. [Downloadable!] (restricted)
  10. 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.. [Downloadable!] (restricted)
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  11. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
  12. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, vol. 74(1), pages 19-39, May. [Downloadable!] (restricted)
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  13. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
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  15. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring. [Downloadable!] (restricted)
  16. Richard E. Kihlstrom & Jean-Jacques Laffont, 1982. "A Competitive Entrepreneurial Model of a Stock Market," NBER Chapters, in: The Economics of Information and Uncertainty, pages 141-202 National Bureau of Economic Research, Inc. [Downloadable!]
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Cited by:
(explanations, 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.)

  1. Emanuela Lotti, 2003. "Co-operative behaviour, productivity and income dispersion," Working Papers 54, Sapienza University of Rome, Department of Public Economics. [Downloadable!]
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