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 (No.796).
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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|
|Official Date:||April 2007|
|Number of Pages:||24|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Restricted or Subscription Access|
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.
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