| Financial constraints and entrepreneurship 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 market incompleteness: savings only, borrowing and lending, and insurance. Using maximum likelihood estimation and statistical model comparison methods, I find evidence that the more advanced financial contract regimes allowing for borrowing or insurance provide a better fit with cross-sectional and time-series data from Thailand compared to the savings only regime. However, a direct comparison between the borrowing and lending and insurance regimes shows that neither of them can be rejected in favor of the other relative to the data. 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. |
