Returns to Skills, Incentives to Study and Optimal Educational Standards
Posted: 20 Jan 2009
Date Written: January 19, 2007
In imperfectly competitive labor markets returns to skills are lower than their productivity and educational standards may play an important role in stimulating students to provide effort. We propose a principal-agent model to analyze the determinants of student effort and the setting of standards by a policy-maker maximizing alternative social welfare functions. We show that if the policy-maker takes into account individuals' future earnings, he finds it optimal to set lower standards in more distorted labor markets, whereas higher standards would be preferable for efficiency reasons. Moreover, we show that labor market distortions may also influence the amount of resources devoted to schools. Finally, it is shown that standard setting may be useful in preventing the opportunism of school principals in the use of resources.
Keywords: Education, Student Effort, Educational Standard, Incentives, Returns to Skills, Wage compression
JEL Classification: I21, J31, D82
Suggested Citation: Suggested Citation