Financial Contracts Structure and Occupational Choice

Financial constraints and differences in entrepreneurial ability are among the key factors affecting economic performance in developing countries. Emphasizing the link between the theory microfoundations and the data, the paper considers a heterogeneous agents model of occupational choice with moral hazard under three financial contract regimes differing in their degree of financial intermediation. Using maximum likelihood estimation and statistical model comparison methods I find evidence that more advanced financial contract regimes allowing for borrowing and/or insurance provide better fit with 1997 Thailand data compared to more restrictive ones. In addition, augmenting the contracts with wealth-pooling lottery redistribution arrangements improves further the explanatory power of the model. A new numerical solution technique for incentive constrained occupational choice models based on non-linear optimization is also proposed.