The dynamics of wealth distribution with asymmetric incentives and endogenous matching

In a dynastic economy with warm-glow bequest individuals can form firms in a frictionless matching market. Contracts within firms are subject to moral hazard. Production tasks differ in incentive intensity and the matching market is open until production takes place. The credit market is perfect. In a principal–agent context, we examine the long-run effects on the wealth distribution, and show the presence of hysteresis and poverty traps. The first draft of the paper was written in the Fall 2002 while I was visiting GSIA at Carnegie Mellon University. Subsequent developments were reached while I visited Columbia Business School in the Fall 2004. I want to thank Oded Galor, and especially Archishman Chakraborty for many valuable discussions.