Working Paper: CEPR ID: DP9981
Authors: Alessandra Bonfiglioli; Gino A. Gancia
Abstract: We study the incentives to improve ability in a model where heterogeneous firms and workers interact in a labor market characterized by matching frictions and costly screening. When effort in improving ability raises both the mean and the variance of the resulting ability distribution, multiple equilibria may arise. In the high-effort equilibrium, heterogeneity in ability is sufficiently large to induce firms to select the best workers, thereby confirming the belief that effort is important for finding good jobs. In the low-effort equilibrium, ability is not sufficiently dispersed to justify screening, thereby confirming the belief that effort is not so important. The model has implications for wage inequality, the distribution of firm characteristics, sorting patterns between firms and workers, and unemployment rates that can help explaining observed cross-country variation in socio-economic and labor market outcomes.
Keywords: beliefs; effort; firm heterogeneity; multiple equilibria; selection; sorting; unemployment; wage inequality
JEL Codes: E24; J24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| effort (D29) | ability distribution (D39) |
| ability distribution (D39) | labor market outcomes (J48) |
| high-effort equilibrium (D51) | wage inequality (J31) |
| high-effort equilibrium (D51) | productivity (O49) |
| low-effort equilibrium (D51) | expected returns from effort (I26) |
| complementarity between firms' screening practices and workers' efforts (L15) | labor market outcomes (J48) |