Question

Question 3

A. Suppose that you are an employer and want to hire people for two positions. These positions pay different amounts and require different levels of skill or dedication. If you know that taking rigorous classes in college is a measure of how skilled or dedicated one is how can you use this information to design a mechanism to get the “right” people to the “right” job?

B. Building off of A, suppose the cost of a hard class is 5,000 for the more skilled person and 8,000 for the less skilled person. Further, suppose the two salaries are 200,000 and 100,000. What are possible requirements to obtain the 200,000 dollar salary?

C. How might you apply this type of thinking to create optimal contracts for workers whose effort you can’t observe?

(Game Theory)

Answer 1

A. As an Employer My motive is to select the Right person for the right job .On knowing that taking rigorous classes in a college is a measure of skill or dedication for the prospective employee ,I would design the framework or mechanism keeping in mind this qualification as a signal for the two positions According to Michael Spence Job Market Signalling Paper If the appropriate cost/benefit structure exists (or is created), "More skilled and Dedicated " students will take more rigorous classes in order to signal their higher productivity than low skilled one who will eiher not take it

B. Suppose the cost of a Hard class

Worker Type	Wage	Cost	Proportion of worker
Non-Skilled	1,00,000	8,000	q1
Skilled	2,00,000	5,000	1-q1

.Suppose that the employer believes that there is a level of education y* below which payoff is 1,00,000 and above which payoff is 2,00,000 . His offered wage schedule W(y) will be:

Requirements would be :

1. There is no rational reason for someone choosing a different level of education from 0 or y*.
2. Non-skilled one will sets y=0 if 1,00,000>2,00,000-y*, that is if the return for not investing in education is higher than investing in education.
3. Skilled one sets y=y* if 2,00,000-y*>1,00,000, that is the return for investing in education is higher than not investing in education.
4. Therefore, putting the previous two inequalities together, if 1,00,000<y*<2,00,000, then the employer initial beliefs are confirmed.
5. There are infinite equilibrium values of y* belonging to the interval [5,000 8,000], but they are not equivalent from the welfare point of view. The higher y* the worse off is Non-skilled , while skilled one is unaffected.

In conclusion, even if education has no real contribution to the marginal product of the worker, the combination of the beliefs of the employer and the presence of signalling transforms the education level y* in a prerequisite for the higher paying job. It may appear to an external observer that education has raised the marginal product of labor, without this necessarily being true.

C. With Imperfect Information about the employee education level, for making the optimal contract The strategy of the Employee would be that : In equilibrium the cost of obtaining the credential must be lower for high productivity workers and act as a signal to the employer such that they will pay a higher wage.

Suppose Skilled and non skilled workers compete for obtaining a 2,00,000 dollar salary would be :

W(2,00,000)=