Les Cahiers de Recherche - HEC Paris
Alessandro CITANNA and Archishman CHAKRABORTY
Occupational Choice, incentives and wealth distribution
Abstract: We consider a model of endogenous occupational choice in
economies with a continuum of individuals who differ in their endowments.
Individuals have a choice of remaining self-employed or engaging in
productive matches with another individual, i.e., forming firms. Matches
are subject to a moral hazard problem with limited liability constraints.
We suppose that the division of the gains from such matches is endogenous
and determined by competitive market forces. We characterize the
equilibrium matching patterns as a function of the nature (symmetry) of the
underlying incentive problem within a firm. We give necessary and
sufficient conditions for "segregation" (wealth-homogeneous firms) to occur
in equilibrium. We show that the equilibrium distributions of occupations,
utilities and surplus typically depend on the distribution of wealth in the
economy, possibly in nonmonotonic ways. We study the "trickle down" effects
of taxation. We show how financial markets imperfections or matching
restrictions may restore segregation.
Keywords: matching; contract theory; club theory; firm formation; incomplete markets; (follow links to similar papers)
JEL-Codes: D20; D31; D50; D82; (follow links to similar papers)
52 pages, January 1, 2001
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