Moral hazard and entrepreneurial failure in a two-sector model of productive matching – with an application to the natural resource curse
Perroni, Carlo and Proto, Eugenio (2007) Moral hazard and entrepreneurial failure in a two-sector model of productive matching – with an application to the natural resource curse. UNSPECIFIED. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).
WRAP_Perroni_twerp_796.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
We analyze a two-sector, general-equilibrium model of productive matching and sorting, where risky production is carried out by pairs of individuals both exerting effort. Risk-neutral (entrepreneurial) individuals can match either with other risk-neutral individuals, or – acting as employers/ insurers – with risk-averse (nonentrepreneurial) individuals. Although the latter option has the potential to generate more surplus, when effort is unobservable and risk is high, the moral hazard problem in mixed matches may be too severe for mixing to be attractive to both risk aversion types, leading to a segregated equilibrium in which risk-averse individuals select low-risk, low-yielding activities. An increase in the return associated with the riskier sector can then trigger a switch from a mixed to a segregated equilibrium, causing aggregate output to fall.
|Item Type:||Working or Discussion Paper (UNSPECIFIED)|
|Subjects:||H Social Sciences > HD Industries. Land use. Labor|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Collective bargaining, Industrial relations, Labor contract, Microeconomics, Industrial organization (Economic theory)|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Number of Pages:||24|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Restricted or Subscription Access|
|References:||Azam, J.P., and J.-Y. Lesueur (1997). “Efficiency Wage and Supervision: Theory and Application to the Ivorian Manufacturing Sector,” Journal of African Economics 6, 445-462. Baland, J.-M., and P. Francois (2000). “Rent-seeking and Resource Booms,” Journal of Development Economics 61, 527-542. Banerjee A.V., and A.F. Newman (1993). “Occupational Choice and the Process of Development,” Journal of Political Economy 101, 274-298. Banerjee A.V., and A.F. Newman (1998). “Information, the Dual Economy, and Development,” Review of Economic Studies 64, 631-653. Besley, T., and M. Ghatak (2005). “Competition and In-centives with Motivated Agents,”American Economic Review 95, 616-636. Besley, T., and M. Ghatak (2006). “Sorting with Motivated Agents: Implications for School Competition and Teacher Incentives,” mimeo. Bhide, A. (2000). The Origin and Evolution of New Businesses. Oxford University Press. Bigsten, A., P. Collier, S. Dercon, M. Fafchamps, B. Gauthier, J. Gunning, A. Isaksson, A. Oduro, R. Oostendorp, C. Patillo, M. Soderbom, F. Teal, A. Zeufack and S. Appleton (2000). “Rates of Return on Physical and Human Capital in Africa’s Manufacturing Sector,” Economic Development and Cultural Change 48, 801-827. Collier, P., and A. Hoeffler (2000).”Greed and Grievance in Civil War,” World Bank Policy Research Paper 2355. Corden, W.M., and J.P. Neary (1982). “Booming Sector and De-industrialisation in a Small Open Economy,” Economic Journal 92, 825-848. Eicher, J. (1985). “Le Syndrome du Diplˆome et le Chˆomage des Jeunes Diplˆom´es en Afrique Francophone au Sud du Sahara: R´eflexions de Synth`ese,”Addis Ababa: JASPA, International Labour Organization. Evans, D., and B. Jovanovic (1989). “An Estimated Model of Entrepreneurial Choice Under Liquidity Constraints,” Journal of Political Economy 97, 808-827. Fafchamps, M., and M. Soderbom (2004). “Wages and Labor Management in African Manufacturing,” mimeo. Galor, O., and J. Zeira (1993). “Income Distribution and Macroeconomics,” Review of Economic Studies 65, 35-52. Gelb, A. (1988). Windfall Gains: Blessing or Curse? Oxford University Press, Oxford. Gylfason, T., T.T. Herbertsson, and G. Zoega (1999). “A Mixed Blessing: Natural Resources and Economic Growth,” Macroeconomic Dynamics 3, 204-225. Kihlstrom, R., and J. Laffont (1979). “A general Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion,” Journal of Political Economy 87, 719-747. Knight, F. (1921). Risk, uncertainty, and profit. Boston: Houghton-Mifflin. Krugman, P. (1987). “The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher: Notes on Trade in the Presence of Dynamic Scale Economies,” Journal of Development Economics 37, 41-55. Lane, P.R., and A. Tornell (1996). “Power, Growth and the Voracity Effect,” Journal of Economic Growth 1, 213-241. Legros, P., and A.F. Newman (2005). “Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities,” forthcoming in Econometrica. Mehlum, H., K. Moene, and R. Torvik (2006). “Institutions and the Resource Curse,” Economic Journal, 116, 1-20. Mookherjee, D. (1997). “Wealth Effects, Incentives and Productivity,” Review of Development Economics 1, 116-133. Moore, K. (2004). “Do Liquidity Constraints Matter for New Entrepreneurs?” mimeo. Newman, A.F. (2007). “Risk-Bearing and Entrepreneurship,” forthcoming in the Journal of Economic Theory. Proto, E. (2007). “Land and the Transition from a Dual to a Modern Economy,” Journal of Development Economics 83, 88-108. Sachs, J.D., and A.M. Warner (1995). “Natural Resource Abundance and Economic Growth,” NBER Working Paper No. 5398. Sachs, J.D., and A.M. Warner (1997a). “Natural Resource Abundance and Economic Growth - revised version,” mimeo, Harvard University. Sachs, J.D., and A.M.Warner (1997b). “Sources of Slow growth in African Economies,” Journal of African Economies 6, 335-376. Sachs, J.D., and A.M. Warner (2001). “The curse of Natural Resources,” European Economic Review 45, 827-838. Serneels, P. (1999). “Unemployment Duration in Urban Ethiopia,” mimeo. Tornell, A., and P.R. Lane (1999). “The Voracity Effect,” American Economic Review 89, 22-46. van Wijnbergen, S. (1984). “The ‘Dutch Disease’: A Disease after All?” Economic Journal 94, 41-55.|
Actions (login required)