TY - JOUR
T1 - Occupational choice and dynamic incentives
AU - Ghatak, Maitreesh
AU - Morelli, Massimo
AU - Sjöström, Tomas
PY - 2001
Y1 - 2001
N2 - 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.
AB - 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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U2 - https://doi.org/10.1111/1467-937X.00190
DO - https://doi.org/10.1111/1467-937X.00190
M3 - Article
SN - 0034-6527
VL - 68
SP - 781
EP - 810
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 4
ER -