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ON IMPERFECT EVALUATION AND EARNING DIFFERENTIALS
Author(s) -
BARRON JOHN M.,
LOEWENSTEIN MARK A.
Publication year - 1986
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1986.tb01836.x
Subject(s) - economics , compensation (psychology) , competence (human resources) , wage , imperfect , work (physics) , perfect information , sorting , microeconomics , labour economics , set (abstract data type) , computer science , psychology , management , social psychology , mechanical engineering , linguistics , philosophy , programming language , engineering
This paper investigates the relationship between the technology for evaluating performance and optimal contract choice. Specifically, the paper examines the different compensation packages that arise when occupations differ in evaluation technology, workers are risk averse, work effort is endogenous, and there exists asymmetric information. In occupations in which it is less difficult to measure output, it is shown that compensation is more closely tied to output; the implications for work effort, the sorting of workers by ability, and average compensation are developed. Analysis of a new data set confirms our predictions concerning earning differentials and wage growth. The powerful 1.6 million‐member National Education Association and other teacher organizations have traditionally fought the notion of rewarding better teachers with more money, arguing that there is no objective way to measure a teacher's competence and that it would lead to favoritism, and bad morale [ Time , June 20, 1983].