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Unformatted text preview: 11/10/2008 1 Spence: Education as a Screen ยก Education does not affect productivity ยก Two types of people ยก A ble types โ worth $150,000 ยก Challenged types โ worth $100 000 ยก C hallenged types worth $100,000 ยก Types are indistinguishable, canโt be tested ยก Easier for type A to take a hard course than type C ยก A: hard course as painful as losing $6,000 ยก B: hard course as painful as losing $9,000 Spence: Education as a Screen ยก Self-Selecting Separation of Types ยก How many courses will distinguish A &C types? ยก If distinguishable, Employers willing to payโฆ ยก A types: $150,000 ยก B types: $100,000 ยก Let n be the number of courses needed to distinguish A & C; we need incentive compatibility : ยก 100,000 โฅ 150,000 โ 9,000ยทn or n โฅ 5.56 ยก 150,000 - 6,000ยทn โฅ 100,000 or n โค 8.33 ยก The โincentive compatibility constraintsโ Spence: Education as a Screen ยก Pooling of Types without a Screen ยก In a competitive job market, salary is average productivity ยก 20% A types, 80% C types ยก Salary: .2(150,000)+.8(100,000)=110,000 ยก 50% A types, 50% C types ยก Salary: .5(150,000)+.5(100,000)=125,000 ยก Everyone gets paid their average productivity Spence: Education as a Screen ยก 50% A types, 50% C types ยก Salary: .5(150,000)+.5(100,000)=125,000 ยก One employer has an idea ยก Offer $132,000 to anyone who takes 1 tough course ยก A types ยข 132,000-125,000 = 7,000 > 6,000 ยข Better to take the course and get paid more...
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- Spring '07
- Payment, Want, Information asymmetry, Spence