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The Capital Market

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  • Andrew F. Newman
Abstract
This paper offers an account of the occupational choice among wage work, self-employment and entrepreneurship which contrasts with the "Knightian" one based on risk attitudes. As shown by example, the latter can lead to perverse results. We propose a model in which imperfect capital markets arising from costly output verification cause the cost of capital to decline with an agent's wealth. Employment contracts, which require costly labor monitoring are then viewed as a substitute for financial contracts. The prevalence of employment contracts (as distinguished from self-employment) then depends on (1) how effective is the labor monitoring technology as a substitute for output verification in the capital market; and (2) how unequal is the distribution of wealth.

Suggested Citation

  • Andrew F. Newman, 1991. "The Capital Market," Discussion Papers 951, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:951
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    References listed on IDEAS

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    Cited by:

    1. Acemoglu, Daron, 1995. "Reward structures and the allocation of talent," European Economic Review, Elsevier, vol. 39(1), pages 17-33, January.
    2. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    3. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, University Library of Munich, Germany.

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