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Occupational Choice and the Process of Development

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  • Abhijit V. Banerjee
  • Andrew F. Newman

Abstract

This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. However, only with sufficient in equality will there be employment contracts; otherwise, depending on average wealth, there is either stagnation or self-employment. Thus, in a static context, the occupational structure depends on distribution. Since the distribution of wealth is itself endogenous, however, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects. In one case the economy develops into prosperity or stagnation, depending on the initial distribution; in the other example, it develops either widespread cottage industry (self-employment) or factory production (employment contracts).

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 911.

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Date of creation: Jul 1990
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Handle: RePEc:nwu:cmsems:911

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  1. Eswaran, Mukesh & Kotwal, Ashok, 1989. "Why Are Capitalists the Bosses?," Economic Journal, Royal Economic Society, vol. 99(394), pages 162-76, March.
  2. Andrew F. Newman, 1991. "The Capital Market," Discussion Papers 951, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Millward, R., 1981. "The emergence of wage labor in early modern England," Explorations in Economic History, Elsevier, vol. 18(1), pages 21-39, January.
  4. Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988. "Income Distribution, Market Size, and Industrialization," NBER Working Papers 2709, National Bureau of Economic Research, Inc.
  5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  6. Cohen, Jon S, 1981. "Managers and Machinery: An Analysis of the Rise of Factory Production," Australian Economic Papers, Wiley Blackwell, vol. 20(36), pages 24-41, June.
  7. Abhijit Banerjee & Andrew F. Newman, 1989. "Risk-Bearing and the Theory of Income Distribution," Discussion Papers 877, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. M. Ali Khan, 1989. "In Praise of Development Economics," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 28(4), pages 337-384.
  9. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  10. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  11. Stiglitz, Joseph E., 1988. "Economic organization, information, and development," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 5, pages 93-160 Elsevier.
  12. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  13. Matsuyama, Kiminori, 1991. "Increasing Returns, Industrialization, and Indeterminacy of Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 617-50, May.
  14. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  15. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  16. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  17. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  18. Glenn M. MacDonald, 1982. "Specific Investments and Nonlabor Income," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 225-233, Spring.
  19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  20. Townsend, Robert M, 1987. "Models as Economies," Economic Journal, Royal Economic Society, vol. 98(390), pages 1-24, Supplemen.
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