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The Capital Market

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Andrew F. Newman

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Abstract

This paper offers an account of the occupational choice among wage work, self-employment and entrepreneurship which contrasts with the "Knightian" one based on risk attitudes. As shown by example, the latter can lead to perverse results. We propose a model in which imperfect capital markets arising from costly output verification cause the cost of capital to decline with an agent's wealth. Employment contracts, which require costly labor monitoring are then viewed as a substitute for financial contracts. The prevalence of employment contracts (as distinguished from self-employment) then depends on (1) how effective is the labor monitoring technology as a substitute for output verification in the capital market; and (2) how unequal is the distribution of wealth.

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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 951.

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Date of creation: Aug 1991
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Handle: RePEc:nwu:cmsems:951

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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. [Downloadable!] (restricted)
  2. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-95, December. [Downloadable!] (restricted)
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  3. Spyros Vassilaikis, 1989. "Increasing Returns and Strategic Behavior: The Worker-Firm Ratio," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 622-636, Winter. [Downloadable!] (restricted)
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  4. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  5. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-97, August. [Downloadable!] (restricted)
  6. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October. [Downloadable!] (restricted)
  7. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  9. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  10. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, UCLA Department of Economics. [Downloadable!]
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