Occupational Choice and Dynamic Incentives

University of Chicago Dept. of Economics Working Paper

46 Pages Posted: 17 Oct 2000

See all articles by Maitreesh Ghatak

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Massimo Morelli

Bocconi University

Tomas Sjöström

Rutgers, The State University of New Jersey - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2000

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 set-up costs. These rents motivate poor agents to work hard and save to overcome the borrowing constraints. With a labor market that is subject to moral hazard, the increased effort raises social welfare. Taxing the rich and subsidizing the poor in order to allow the poor to become self-financed entrepreneurs reduces the incentives for young agents to work hard and save. A reduction of the imperfections in the credit market has the same effect since it reduces the entrepreneurial rents.

JEL Classification: D50, D82, J41

Suggested Citation

Ghatak, Maitreesh and Morelli, Massimo and Sjöström, John Tomas, Occupational Choice and Dynamic Incentives (May 28, 2000). University of Chicago Dept. of Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=241794 or http://dx.doi.org/10.2139/ssrn.241794

Maitreesh Ghatak (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

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HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

Massimo Morelli

Bocconi University ( email )

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Milan, 20136
Italy

John Tomas Sjöström

Rutgers, The State University of New Jersey - Department of Economics ( email )

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New Brunswick, NJ 08901
United States

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