Occupational Choice and Dynamic Incentives

We study an overlapping generations version of the principal-agent problem, where incentive contracts are determined in general equilibrium. All individuals are workers when young, but have a choice between becoming entrepreneurs or remaining workers when old. Imperfections in the credit market give...

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Bibliographic Details
Published inThe Review of economic studies Vol. 68; no. 4; pp. 781 - 810
Main Authors Ghatak, Maitreesh, Morelli, Massimo, Sjöström, Tomas
Format Journal Article
LanguageEnglish
Published Wiley-Blackwell 01.10.2001
Review of Economic Studies Ltd
Subjects
Bank loans
Credit
Economic rent
Entrepreneurs
Investment credit
Labor markets
Market equilibrium
Social welfare
Transaction costs
Wages
Online AccessGet full text
ISSN0034-6527
1467-937X
DOI10.1111/1467-937X.00190

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Summary:We study an overlapping generations version of the principal-agent problem, where incentive contracts are determined in general equilibrium. All individuals are workers when young, but have a choice between becoming entrepreneurs or remaining workers when old. Imperfections in the credit market give rise to rents in entrepreneurial activities involving capital. These rents motivate poor young agents to work hard and save to overcome the borrowing constraints. With a labour market that is subject to moral hazard, the increased effort raises social welfare. Policies that reduce credit market imperfections, or redistribute income, may reduce welfare by dampening this effect.
Bibliography:istex:D0846AB8BA0912E3AEE0E1332163F0B363C5376E
ark:/67375/HXZ-98MSCXBP-Z
ISSN:0034-6527
1467-937X
DOI:10.1111/1467-937X.00190