Adverse Selection when Jobs are Hard to Do
| Author | Anthony A. Sampson,Robert Simmons |
| Published date | 01 August 2000 |
| DOI | http://doi.org/10.1111/1467-9485.00165 |
| Date | 01 August 2000 |
{Journals}sjpe/47_3/x179/makeup/x179.3d
Scottish Journal of Political Economy, Vol. 47, No. 3, August 2000
#Scottish Economic Society 2000.Publ ishedby Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
ADVERSE SELECTION WHEN JOBS ARE HARD
TO DO
Anthony A. Sampson and Robert Simmons
ABSTRACT
Privately observed ability increases output and reduces effort required to complete
tasks, in a model where harder tasks produce more output. The relation between
average quality of the workforce and the wage rate is ambiguous. The model also
produces a rat-race, in the sense that some individuals work harder than is socially
optimal. This distortion can be corrected by a non-linear tax.
II
NTRODUCTION
Pete Sampras not only plays better tennis than we do: he finds it easier. Many
superior people are effortlessly superior. In this paper we explore some
consequences of a possible negative relationship between productivity in any
task and the effort required to perform the task. One consequence is that we can
no longer be sure that raising the wage leads to an improvement in the average
quality of a firm's workforce. Another consequence is that a competitive
equilibrium could exhibit socially excessive levels of effort: adverse selection,
resulting from the incentive to mimic an individual of higher ability, could lead
to a `Rat-race', in the sense of Akerlof (1976), Miyazaki (1977) and Stiglitz
(1975). Thirdly, it is possible for firms to be rationed in the labour market, a
possibility noted, in the context of profit related pay, by Weitzman (1984).
Raising any wage rate will induce more workers to seek a job with the
employer. Some of these will be of lower quality than the average of those in situ,
and some of higher quality. Where the firm can observe quality without cost and
without error, and is not rationed in the labour market, it will only take higher
quality workers. Otherwise the net effect on average quality of the workforce is a
priori ambiguous. Two examples are well known in the literature. In Weiss
(1980) the quality of a worker is recognised outside the firm, and is reflected in
his reservation wage, which increases with quality. Raising the wage will not
therefore lead to more applications from people of lower quality than those in
situ, since they would have applied to the firm at the original wage. Any new
workers attracted to the firm must therefore be of higher quality than those in
situ, hence raising the wage must increase the average quality of the workforce.
325
University of Salford
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