Occupational Choice and Dynamic Incentives.

Ghatak, Maitreesh; Morelli, Massimo; Sjöström, Tomas

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.

LABOR incentives; CONTRACTS; LABOR market; LABOR supply; CAPITAL; EQUILIBRIUM; MARKETS; ECONOMICS; ECONOMETRICS; ENTREPRENEURSHIP

Review of Economic Studies, 2001, Vol 68, Issue 4, p781

0034-6527

Academic Journal

10.1111/1467-937X.00190