Strategy17Handout - 1 Spence Education as a Screen ...

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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, can’t 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 – 9,000·n or n ≥ 5.56 ¡ 150,000 - 6,000·n ≥ 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 - 1 Spence Education as a Screen ...

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