Self employment, education and credit constraints: A model of interdependent credit rationing decisions

An OLG model with occupational choice and endogenous credit constraints is developed. Heterogeneous agents decide whether to become educated when young; this requires borrowing. In the second period, middle-aged educated agents decide whether to become self employed in the following period, which again requires borrowing. Credit may be rationed because of a moral hazard problem in lending. In a macroeconomic framework with capital, we derive a number of comparative statics results; we consider the effects of changes that relax credit constraints on the real wage and the real interest rate and discuss issues relating to the interdependence of credit constraints. (C) 2004 Elsevier Inc. All rights reserved.