OCCUPATIONAL CHOICE AND THE PROCESS OF DEVELOPMENT

This paper models economic development as a process of institutional t ransformation by focusing on the interplay between agents' occupationa l decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employm ent, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there be employment contrac ts; otherwise, there is either subsistence or self-employment. Thus, i n static equilibrium, the occupational structure depends on distributi on. Since the latter is itself endogenous, we demonstrate the robustne ss of this result by extending the model dynamically and studying exam ples in which initial wealth distributions have long-run effects. In o ne 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 pros perity or stagnation.