Work effort, consumption, and portfolio selection: when the occupational choice matters |
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Authors: | Sascha Desmettre Alexander Szimayer |
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Institution: | 1. Department of Financial Mathematics, Fraunhofer ITWM, Fraunhofer Platz 1, 67663, Kaiserslautern, Germany 2. School of Business, Economics and Social Sciences, University of Hamburg, Von-Melle-Park 5, 20146, Hamburg, Germany
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Abstract: | We consider a highly-qualified individual with respect to her choice between two distinct career paths. She can choose between
a mid-level management position in a large company and an executive position within a smaller listed company with the possibility
to directly affect the company’s share price. She invests in the financial market including the share of the smaller listed
company. The utility maximizing strategy from consumption, investment, and work effort is derived in closed form for logarithmic
utility. The power utility case is discussed as well. Conditions for the individual to pursue her career with the smaller
listed company are obtained. The participation constraint is formulated in terms of the salary differential between the two
positions. The smaller listed company can offer less salary. The salary shortfall is offset by the possibility to benefit
from her work effort by acquiring own-company shares. This gives insight into aspects of optimal contract design. Our framework
is applicable to the pharmaceutical and financial industry, and the IT sector. |
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Keywords: | |
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