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Occupational Choice, incentives and wealth distribution

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  • CITANNA, Alessandro
  • CHAKRABORTY, Archishman

    (Baruch College, CUNY, New York)

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

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
Date of revision:
Handle: RePEc:ebg:heccah:0720

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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Keywords: matching; contract theory; club theory; firm formation; incomplete markets;

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References

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  1. Richard E. Kihlstrom & Jean-Jacques Laffont, . "A Competitive Entrepreneurial Model of a Stock Market," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 02-80, Wharton School Rodney L. White Center for Financial Research.
  2. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers, Stanford - Institute for Thoretical Economics 11, Stanford - Institute for Thoretical Economics.
  3. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R Zame, 2003. "Clubs and the Market," Levine's Working Paper Archive 618897000000000754, David K. Levine.
  5. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, Elsevier, vol. 74(1), pages 19-39, May.
  6. 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, Elsevier, vol. 12(2), pages 105-137, October.
  7. Edward S. Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper, Federal Reserve Bank of Richmond 00-08, Federal Reserve Bank of Richmond.
  8. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Gary S. Becker, 1974. "A Theory of Marriage: Part II," NBER Chapters, National Bureau of Economic Research, Inc, in: Marriage, Family, Human Capital, and Fertility, pages 11-26 National Bureau of Economic Research, Inc.
  10. Patrick Legros & Andrew Newman, 2002. "Monotone matching in perfect and imperfect worlds," ULB Institutional Repository 2013/7032, ULB -- Universite Libre de Bruxelles.
  11. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 10(1), pages 8-23, February.
  12. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, Elsevier, vol. 70(2), pages 312-341, August.
  13. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  14. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1777, Harvard - Institute of Economic Research.
  15. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1357-67, November.
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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, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  2. Maitreesh Ghatak & Alexander Karaivanov, 2011. "Contractual Structure and Endogenous Matching in Partnershipso," STICERD - Economic Organisation and Public Policy Discussion Papers Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 024, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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