Suppose that workers have 4 levels of productivity in a labor market. High productivity is 10, medium productivity is 6, low productivity is 2, and trump productivity is negative 10. The distribution of workers is 1/8 high, 1/4 medium, 1/2 low, and 1/8 trump. The value of time in leisure is half of labor market productivity. Find the equilibrium wage. Is there adverse selection?
- Let U=w-e where U is utility, w is wage, and e denotes effort. Profits are q-w, where q is output. Effort is zero or 10. If e=10, q=100 with probability 0.8 and q=0 with probability 0.2. If e=0, q=100 with probability 0.4 and q=0 with probability 0.6. The principle has an outside option of 20 and the agent has an outside option of 30. What is the equilibrium contract?
- Suppose that high productivity is 10, medium productivity is 6, and low productivity is 2. Each type constitutes 1/3 of the labor market. The education signal can be zero or one. The cost of signaling is 20e divided by productivity. What is the equilibrium? Is it separating, semi-separating, or pooling?
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