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Occupational Choice, incentives and wealth distribution

  • CITANNA, Alessandro
  • CHAKRABORTY, Archishman

    (Baruch College, CUNY, New York)

We consider a model of endogenous occupational choice in economies with a continuum of individuals who differ in their endowments. Individuals have a choice of remaining self-employed or engaging in productive matches with another individual, i.e., forming firms. Matches are subject to a moral hazard problem with limited liability constraints. We suppose that the division of the gains from such matches is endogenous and determined by competitive market forces. We characterize the equilibrium matching patterns as a function of the nature (symmetry) of the underlying incentive problem within a firm. We give necessary and sufficient conditions for "segregation" (wealth-homogeneous firms) to occur in equilibrium. We show that the equilibrium distributions of occupations, utilities and surplus typically depend on the distribution of wealth in the economy, possibly in nonmonotonic ways. We study the "trickle down" effects of taxation. We show how financial markets imperfections or matching restrictions may restore segregation.

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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 720.

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Length: 52 pages
Date of creation: 01 Jan 2001
Date of revision:
Handle: RePEc:ebg:heccah:0720
Contact details of provider: Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
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  1. Patrick Legros & Andrew Newman, 1996. "Wealth effects, distribution, and the theory of organization," ULB Institutional Repository 2013/7036, ULB -- Universite Libre de Bruxelles.
  2. Patrick Legros & Andrew Newman, 2002. "Monotone matching in perfect and imperfect worlds," ULB Institutional Repository 2013/7032, ULB -- Universite Libre de Bruxelles.
  3. Harold L. Cole & Edward C. Prescott, 1996. "Valuation equilibria with clubs," Staff Report 174, Federal Reserve Bank of Minneapolis.
  4. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
  5. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
  6. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  7. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  8. Richard E. Kihlstrom & Jean-Jacques Laffont, . "A Competitive Entrepreneurial Model of a Stock Market," Rodney L. White Center for Financial Research Working Papers 2-80, Wharton School Rodney L. White Center for Financial Research.
  9. Gary S. Becker, 1974. "A Theory of Marriage: Part II," NBER Chapters, in: Marriage, Family, Human Capital, and Fertility, pages 11-26 National Bureau of Economic Research, Inc.
  10. Kaneko, Mamoru & Wooders, Myrna Holtz, 1986. "The core of a game with a continuum of players and finite coalitions: The model and some results," Mathematical Social Sciences, Elsevier, vol. 12(2), pages 105-137, October.
  11. Kremer, M & Maskin, E, 1996. "Wage Inequality and Segregation by Skill," Working papers 96-23, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  13. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  14. Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Discussion Papers 99-04, University of Copenhagen. Department of Economics.
    • Bryan Ellickson & Birgit Grodal & Suzanne Scotchmer & William R. Zame, 1999. "Clubs and the Market," Econometrica, Econometric Society, vol. 67(5), pages 1185-1218, September.
  15. Michael Kremer & Eric Maskin, 1996. "Wage Inequality and Segregation," Harvard Institute of Economic Research Working Papers 1777, Harvard - Institute of Economic Research.
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