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.
Length: Date of creation: Jul 1990 Date of revision: Handle: RePEc:nwu:cmsems:911
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