The Lemons Problem in a Labor Market with Intrinsic Motivation: When Higher Salaries Pay Worse Workers

Quaderni DSE Working Paper N° 883

39 Pages Posted: 31 May 2013 Last revised: 15 Sep 2014

See all articles by Francesca Barigozzi

Francesca Barigozzi

University of Bologna - Department of Economics

Nadia Burani

University of Bologna - School of Economics, Management, and Statistics

Davide Raggi

University of Bologna - Department of Economics

Date Written: May 28, 2013

Abstract

We study the Lemons Problem when workers have private information on both their skills and their intrinsic motivation. When workers are motivated, ine¢ ciencies due to adverse selection are mitigated and a change in salaries may have unexpected consequences. With a su¢ ciently strong and positive association between motivation and productivity, a wage increase may attract less motivated and also less productive workers. When the association is positive but small, it instead may attract more productive and also more motivated workers. Our theoretical analysis reconciles contrasting empirical evidence on vocational sectors such as for public servants, teachers, health professionals and politicians. Our results also inform the current policy debate on whether it is possible to improve the overall quality of workers by changing their salary.

Keywords: skills, intrinsic motivation, the bidimensional Lemons problem, labor supply

JEL Classification: J24, J21, J3, D82

Suggested Citation

Barigozzi, Francesca and Burani, Nadia and Raggi, Davide, The Lemons Problem in a Labor Market with Intrinsic Motivation: When Higher Salaries Pay Worse Workers (May 28, 2013). Quaderni DSE Working Paper N° 883, Available at SSRN: https://ssrn.com/abstract=2271987 or http://dx.doi.org/10.2139/ssrn.2271987

Francesca Barigozzi (Contact Author)

University of Bologna - Department of Economics ( email )

P.zza Scaravilli 2
40126 Bologna, 40126
Italy

Nadia Burani

University of Bologna - School of Economics, Management, and Statistics ( email )

Davide Raggi

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy

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