ADEclass14_10-11_72 - Session #14 Outline: Comments on...

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Unformatted text preview: Session #14 Outline: Comments on first group case study Selection: Screening Signaling (Part 1) For next session: Problem set 4 : I will ask in class Readings: Besanko, 476-487 . M&R, 166-188 (introduction, examples). Groups working on segment 3: Proposals by Thursday! Session #14 Outline: Comments on first group case study Selection: Screening Signaling (Part 1) Some comments about first round of case studies Presentation: Make sure you have a unified presentation (not three more or less related parts) An effective 12 minute presentation has to be well organized and provide one or two clear messages . Focus on the essentials: Example: last week, the presenters devoted a lot of time to describe the labor market reforms and had no time to discuss one of their main explanations for the strike (asymmetric information) Rehearse the presentation: Timing “Performance” Some comments about first round of case studies Contents: You really have to know the theory well! Preparation of case study: Come talk to me to discuss your ideas before writing down the final version of the assignment. Some comments about first round of case studies A general framework for applying Efficiency Principle/Coase Theorem Who are the parties involved? What are the feasible alternatives? To determine efficient alternatives: Use definition (is alternative dominated?) Use VMP ( if no wealth effects, or as an approximation ) Who are the parties who actually bargain? Are there barriers to effective bargaining (asymmetric information, bargaining costs,…)? Are there wealth effects ( only if we want to apply VMP or the Coase Theorem)? Session #14 Outline: Comments on first group case study Selection: Screening Signaling (Part 1) Selection: screening Recall the problem: Firm hiring a candidate for a job A symmetric information: Candidate knows his/her abilities/values/knowledge The firm doesn’t Problem: how to hire the right candidates and not the rest? How to attract productive workers? How not to pay too much to less productive ones? Screening example 1 : performance pay Single wage: Risk 1: only less productive workers accept ( adverse selection ) Why? More productive workers may have better alternatives (start their own business, go to a good usiness school igher eservation wage” Screening : performance pay business school) b higher “reservation wage” (amount earned at the best alternative) Risk 2: both productive and less productive workers accept, but the less productive workers are paid “too much” We cannot attract only the productive workers if we pay a single wage! Screening : performance pay Reservation wage W* W* Pay Pay “Reservation wage” may Suppose the firm offers a fixed pay W* Workers with ability < A* will take the job (W* > reservation wage) Workers with ability > A* will not take the job (W* < reservation wage) A* A* “Reservation wage” may depend on productivity If we offer two wages: Everyone will choose the high one!...
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This note was uploaded on 02/03/2011 for the course ECON 302 taught by Professor Pablo during the Spring '11 term at Universidad Carlos III de Madrid.

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ADEclass14_10-11_72 - Session #14 Outline: Comments on...

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