Journal Article

Occupational Choice and Dynamic Incentives

Maitreesh Ghatak, Massimo Morelli and Tomas Sjöström

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 68, issue 4, pages 781-810
Published in print October 2001 | ISSN: 0034-6527
Published online October 2001 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00190
Occupational Choice and Dynamic Incentives

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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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Subjects: Economics

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