Essays on heterogeneous agents, occupational choice, and development

Abstract

The aim of this thesis is to contribute to our understanding of the consequences of economic development on the occupational choice of agents and its effects on macroeconomic variables, such as structural change and income inequality. The interplay between different types of agents is at the center of my research, both when it comes to matching between agents and sorting from agents to sectors. The first chapter focuses on the role of financial development for structural change. When credit constrained, more talented agents sort into more labor-intensive sectors than less talented agents. When borrowing becomes more available, talented agents sort into capital-intensive sectors to optimally leverage their talent. Consequently, the capital rental rates rise and less talented agents sort into labor-intensive sectors. Thus, financial development reverses the sorting pattern. Furthermore, simulation results indicate that employment shares increase in relatively labor-intensive sectors. I show that the empirical data is consistent with these theoretical findings. In the second chapter, I analyze the consequences of cooperation on inequality. I develop a heterogeneous agents model of cooperation distinguishing between two types of cooperation, between-task and within-task cooperation. The former is the opportunity to assign different tasks to different agents. The latter is the reassignment of tasks from one agent to another in cases where the first agent fails. Cooperation increases inequality at the top and decreases inequality at the bottom. Within-task cooperation is more inequality-enhancing than between-task cooperation. I also show that cooperation can lead to a greater skill premium in economies with a more dispersed talent distribution.