Les Cahiers de Recherche - HEC Paris
No 682:
Occupational Choice, Incentives and Wealth Distribution
CITANNA Alessandro and CHAKRABORTY Archishman
Abstract: We consider a model of endogenous occupational choice in
economies with a continuum of individuals who differ in their wealth
endowments. Individuals have a choice of remaining self-employed or
engaging in productive matches with other individuals, i.e., forming firms.
Such frictionless matches are subject to a hidden-action moral hazard
problem with a limited liability constraint. This leads to wealth effetc
and the payoff-relevance of wealth differences across individuals. We
suppose that the division of the gains from such matches is endogenous and
determined by competitive market forces. Contracts are chosen optimally
within matches subject to the market determined division of the gains from
matching. We show that when financial markets are perfect the equilibrium
distributions of occupations, utilities and surplus typically depend on the
distribution of wealth in the economy if and only if some limited liability
constraints bind in equilibrium. When financial markets are imperfect
however, the equilibrium might involve the economy segregating into a
high-surplus rich sector and a low-surplus poor sector, independent of the
distribution of wealth in the economy. We characterize the nature of the
equilibrium as a function of the nature (symmetry) of the underlying agency
problem within a firm and of financial market imperfections.
Keywords: Incentives; wealth distribution; (follow links to similar papers)
JEL-Codes: D20; D31; D50; D82; (follow links to similar papers)
46 pages, July 1, 1999
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