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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| Published in | The Review of economic studies Vol. 68; no. 4; pp. 781 - 810 |
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| Main Authors | , , |
| Format | Journal Article |
| Language | English |
| Published |
Wiley-Blackwell
01.10.2001
Review of Economic Studies Ltd |
| Subjects | |
| Online Access | Get full text |
| ISSN | 0034-6527 1467-937X |
| DOI | 10.1111/1467-937X.00190 |
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| Abstract | 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. |
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| AbstractList | 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. |
| Author | Sjöström, Tomas Morelli, Massimo Ghatak, Maitreesh |
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| SubjectTerms | Bank loans Credit Economic rent Entrepreneurs Investment credit Labor markets Market equilibrium Social welfare Transaction costs Wages |
| Title | Occupational Choice and Dynamic Incentives |
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