Occupational Choice and the Process of Development

TLDR

The paper aims to model economic development as institutional transformation driven by agents’ occupational choices and wealth distribution, and to test the robustness of this relationship in dynamic extensions. The authors model capital market imperfections that cause poor agents to take wage jobs while wealthy agents become entrepreneurs, generating employment contracts only when inequality is high, and extend the model dynamically to capture endogenous wealth effects. They find that the occupational structure in equilibrium hinges on wealth distribution, and that dynamic simulations show economies can evolve into either cottage industry or factory production, or into prosperity or stagnation, depending on initial wealth.

Abstract

This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects. In one case the economy develops either widespread cottage industry (self-employment) or factory production (employment contracts), depending on the initial distribution; in the other example, it develops into prosperity or stagnation.