Occupational choice and dynamic incentives

Maitreesh Ghatak, Massimo Morelli, Tomas Sjöström

Research output: Contribution to journalArticlepeer-review

41 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)781-810
Number of pages30
JournalReview of Economic Studies
Issue number4
StatePublished - 2001
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics


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