The Lemons Problem in a Labor Market with Intrinsic Motivation - When Higher Salaries Pay Worse Workers

Abstract

We study the Lemons Problem when workers have private information on both their skills and their intrinsic motivation. When workers are motivated, ine¢ ciencies due to adverse selection are mitigated and a change in salaries may have unexpected consequences. With a su¢ ciently strong and positive association between motivation and productivity, a wage increase may attract less motivated and also less productive workers. When the association is positive but small, it instead may attract more productive and also more motivated workers. Our theoretical analysis reconciles contrasting empirical evidence on vocational sectors such as for public servants, teachers, health professionals and politicians. Our results also inform the current policy debate on whether it is possible to improve the overall quality of workers by changing their salary.