Strategy17Handout - 11/10/2008 1 Spence: Education as a...

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Unformatted text preview: 11/10/2008 1 Spence: Education as a Screen Education does not affect productivity Two types of people A ble types worth $150,000 Challenged types worth $100 000 C hallenged types worth $100,000 Types are indistinguishable, cant be tested Easier for type A to take a hard course than type C A: hard course as painful as losing $6,000 B: hard course as painful as losing $9,000 Spence: Education as a Screen Self-Selecting Separation of Types How many courses will distinguish A &C types? If distinguishable, Employers willing to pay A types: $150,000 B types: $100,000 Let n be the number of courses needed to distinguish A & C; we need incentive compatibility : 100,000 150,000 9,000n or n 5.56 150,000 - 6,000n 100,000 or n 8.33 The incentive compatibility constraints Spence: Education as a Screen Pooling of Types without a Screen In a competitive job market, salary is average productivity 20% A types, 80% C types Salary: .2(150,000)+.8(100,000)=110,000 50% A types, 50% C types Salary: .5(150,000)+.5(100,000)=125,000 Everyone gets paid their average productivity Spence: Education as a Screen 50% A types, 50% C types Salary: .5(150,000)+.5(100,000)=125,000 One employer has an idea Offer $132,000 to anyone who takes 1 tough course A types 132,000-125,000 = 7,000 > 6,000 Better to take the course and get paid more...
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Strategy17Handout - 11/10/2008 1 Spence: Education as a...

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