Occupational Choice and Dynamic Incentives

Posted: 12 May 2001

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

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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 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. Available at SSRN: https://ssrn.com/abstract=261374

Maitreesh Ghatak (Contact Author)

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

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Massimo Morelli

Bocconi University ( email )

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Italy

John Tomas Sjöström

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

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United States

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