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Occupational choice, incentives and wealth distribution

Author

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  • Archishman Chakraborty
  • Alessandro Citanna

Abstract

We consider a model of endogenous occupational choice in economies with a continuum of individuals who differ in their wealth endowments. Individuals have a choice of remaining self-employed or engaging in productive matches with other individuals, i.e., forming ``firms''. Such matches are subject to a hidden-action moral hazard problem with a limited liability constraint. This leads to wealth effects and the payoff-relvance of wealth differences across individuals. We suppose that the division of the gains from such matches is endogenous and determined by competitive market forces but that contracts are chosen optimally within matches subject to the market determined division of the gains from matching. We show, in contrast to previous results in the literature, that even when financial markets are perfect, the equilibrium distributions of occupations, utilities and surplus depend on the distribution of wealth in the economy. When financial markets are imperfect however, the equilibrium might involve the economy ``segregating'' into a high-surplus rich sector and a low-surplus poor sector, independent of the distribution of wealth in the economy. We also characterize the nature of the equilibrium as a function of financial market imperfections and also as a function of the nature (symmetry) of the underlying agency problem within a firm.

Suggested Citation

  • Archishman Chakraborty & Alessandro Citanna, "undated". "Occupational choice, incentives and wealth distribution," GSIA Working Papers 225, Carnegie Mellon University, Tepper School of Business.
  • Handle: RePEc:cmu:gsiawp:225
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kanidska Dam, 2015. "Incentives and Income Distribution in Tenancy Relationships," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 171(3), pages 512-543, September.
    2. Mette Ejrnæs & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    3. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute, revised 12 Aug 2011.
    4. Ghatak, Maitreesh & Karaivanov, Alexander, 2011. "Contractual Structure and Endogenous Matching in Partnerships," CEPR Discussion Papers 8298, C.E.P.R. Discussion Papers.
    5. Archishman Chakraborty & Alessandro Citanna, "undated". "Occupational choice, incentives and wealth distribution," GSIA Working Papers 225, Carnegie Mellon University, Tepper School of Business.
    6. Chakraborty, Archishman & Citanna, Alessandro, 2005. "Occupational choice, incentives and wealth distribution," Journal of Economic Theory, Elsevier, vol. 122(2), pages 206-224, June.
    7. Ayça Kaya & Galina Vereshchagina, 2015. "Moral hazard and sorting in a market for partnerships," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 73-121, September.
    8. Kaniska Dam, 2009. "A General Equilibrium Analysis of the Credit Market," Working papers DTE 461, CIDE, División de Economía.

    More about this item

    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; Mechanism Design

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