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.