IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/1997028.html
   My bibliography  Save this paper

Moral hazard and overlapping generations with endogenous occupational choice

Author

Listed:
  • GHATAK, Maithreesh

    (University of Chicago)

  • MORELLI, Massimo

    () (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium and Iowa State University, United States)

  • SJÖSTRÖM, Tomas

    (Harvard University)

Abstract

This paper introduces a general equilibrium, overlapping generations model of the principal- agent problem. Bargaining power, occupational choice, and the returns to each occupation are endogenous. Individuals live for two periods and must work when young. When old, they have a choice between becoming principals or remaining agents. Successful workers are paid high wages and may become self financed principals when old; unsuccessful workers are paid low wages and can become principals only by borrowing money. In a “high wage” equilibrium, an imperfect credit market (which makes it costly to borrow money due to, for example, moral hazard between lender and borrower) mitigates the moral hazard problem on the labor market: young workers work harder than in the static model (for a given wage) in order to succeed and become self-financed principals (the “American Dream” effect). The extra effort makes it possible for principals to pay high wages. However, there is a coordination problem. For the same parameter values that give rise to the “high wage” equilibrium, there also exist equilibria where wages are so low that even successful agents need to borrow money if they are to become principals. Effort is then low because wages are low, and because there is no “American Dream”.

Suggested Citation

  • GHATAK, Maithreesh & MORELLI, Massimo & SJÖSTRÖM, Tomas, 1997. "Moral hazard and overlapping generations with endogenous occupational choice," CORE Discussion Papers 1997028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1997028
    as

    Download full text from publisher

    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1997.html
    Download Restriction: no

    References listed on IDEAS

    as
    1. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
    2. Jay B. Barney, 1986. "Strategic Factor Markets: Expectations, Luck, and Business Strategy," Management Science, INFORMS, vol. 32(10), pages 1231-1241, October.
    3. R. E. Caves & M. E. Porter, 1977. "From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 241-261.
    4. Kimmel, Sheldon, 1992. "Effects of Cost Changes on Oligopolists' Profits," Journal of Industrial Economics, Wiley Blackwell, vol. 40(4), pages 441-449, December.
    5. Susan Athey & Armin Schmutzler, 1995. "Product and Process Flexibility in an Innovative Environment," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 557-574, Winter.
    6. William Novshek, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 85-98.
    7. Mirman Leonard J. & Samuelson Larry & Schlee Edward E., 1994. "Strategic Information Manipulation in Duopolies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 363-384, April.
    8. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, pages 157-180.
    9. W. Salant, Stephen & Shaffer, Greg, 1998. "Optimal asymmetric strategies in research joint ventures," International Journal of Industrial Organization, Elsevier, pages 195-208.
    10. Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 125-142.
    11. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
    12. Barbara J. Spencer & James A. Brander, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 707-722.
    13. Amir, Rabah, 1996. "Cournot Oligopoly and the Theory of Supermodular Games," Games and Economic Behavior, Elsevier, vol. 15(2), pages 132-148, August.
    14. Amir, Rabah, 1996. "Continuous Stochastic Games of Capital Accumulation with Convex Transitions," Games and Economic Behavior, Elsevier, vol. 15(2), pages 111-131, August.
    15. Theodore C. Bergstrom & Hal R. Varian, 1985. "When Are Nash Equilibria Independent of the Distribution of Agents' Characteristics?," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 715-718.
    16. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
    17. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    18. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-1306, December.
    19. Rabah Amir & John Wooders, 1999. "Effects of One-Way Spillovers on Market Shares, Industry Price, Welfare, and R & D Cooperation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(2), pages 223-249, June.
    20. Fishman, Arthur & Rob, Rafael, 1995. "The Durability of Information, Market Efficiency and the Size of Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 19-36, February.
    21. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June.
    22. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    23. Spence, Michael, 1984. "Cost Reduction, Competition, and Industry Performance," Econometrica, Econometric Society, vol. 52(1), pages 101-121, January.
    24. Salant, S.W. & Shaffer, G., 1992. "Optimal Asymmetric Strategies in Research Joint Ventures: A Comment on the Literature," Papers 93-06, Michigan - Center for Research on Economic & Social Theory.
    25. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    26. Roller, Lars-Hendrik & Sinclair-Desgagne, Bernard, 1996. "On the heterogeneity of firms," European Economic Review, Elsevier, vol. 40(3-5), pages 531-539, April.
    27. Boyer, M. & Moreaux, M., 1993. "Strategic Considerations in the Choice of Technological Flexibility," Papers 93.291, Toulouse - GREMAQ.
    28. De Bondt, Raymond & Slaets, Patrick & Cassiman, Bruno, 1992. "The degree of spillovers and the number of rivals for maximum effective R &D," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 35-54, March.
    29. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-223, December.
    30. Rabah Amir & John Wooders, 1998. "Cooperation vs. competition in R&D: The role of stability of equilibrium," Journal of Economics, Springer, vol. 67(1), pages 63-73, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Moral Hazard; Overlapping Generations; Occupational Choice; Bargaining Power; Credit Market Imperfections; American Dream;

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:1997028. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS). General contact details of provider: http://edirc.repec.org/data/coreebe.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.