ECOS3003 Lecture Notes - Lecture 6: Rational Choice Theory, Human Capital
30 Jul 2018
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Employees: objectives of compensation policy, to attract and retain qualified employees, to motivate employees to be more productive. Contracting objective: owners want to design compensation package that attracts and retains employees with required skills at lowest possible cost. Level of pay basic competitive model: market wage rates costless and observable, all jobs are identical (risk, location, etc, no long-term contracts, all compensation monetary (no fringe benefits). Individuals are identical in their training and skills. In this case, of employees determined where (cid:1839)=. Before contract is signed, ex ante an employer cannot tell whether a worker is productive or not: workers signal their productivity by getting an education, high productivity workers get education, low productivity workers do not (in separating equilibrium). Employers see education and can tell the productivity of a worker and offer a wage accordingly. Employers competitive, therefore wage must equal expected mrp. Type is unobservable, but employers can observe education level.
