Adverse Selection in an Efficiency Wage Model with Heterogeneous Agents

Ricardo Araujo and Adolfo Sachsida

Economia, 2010, vol. 11, issue 3, 495_503

Abstract: This paper studies efficiency wages in the presence of heterogeneous workers and asymmetric information. It includes an incentive compatibility constraint (ICC) in the efficiency wage model with heterogeneous workers to show that the implementation of efficiency wages in the presence of heterogeneity faces the problem of adverse selection. Employees with a smaller effort aversion supply a smaller level of effort than what is optimal under perfect information due to hidden information. In this vein only a second best solution is obtained.

Keywords: Efficiency Wages; Adverse Selection; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: J41 M59 (search for similar items in EconPapers)
Date: 2010
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