How to beat the average

How to beat the average Empirical evidence has shown that people systematically overrate own performance relatively to others. This paper investigates production with identical workers where each one believes to be more productive than other workers. In a simple efficiency wage model, we ask how these seemingly incompatible beliefs can be made compatible with one another. We suggest that to compensate for the subjectively perceived productivity gap, each worker chooses an effort level lower than that attributed to others. The latter is estimated as the lowest effort that allows to pass the firm's monitoring test. Since rational agents will not maintain expectations which turn out to be systematically wrong, we introduce a "consistency requirement for false beliefs". Accordingly, predictions based on the "wrong" model must agree with the observations of the "true" model. We show that even with consistency, less effort is supplied than in the full information setting. Hence, the wage-effort relationship gets less efficient from the firm's viewpoint. At a first sight, at the firm-level workers gain from holding false beliefs, while profits unambigously fall. At the aggregate market outcome, however, the firms' labor demand declines, total output falls, and the rate of unemployment rises, decreasing workers utility again. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Quality & Quantity Springer Journals

How to beat the average

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1997 by Kluwer Academic Publishers
Subject
Social Sciences; Methodology of the Social Sciences; Social Sciences, general
ISSN
0033-5177
eISSN
1573-7845
D.O.I.
10.1023/A:1004201429900
Publisher site
See Article on Publisher Site

Abstract

Empirical evidence has shown that people systematically overrate own performance relatively to others. This paper investigates production with identical workers where each one believes to be more productive than other workers. In a simple efficiency wage model, we ask how these seemingly incompatible beliefs can be made compatible with one another. We suggest that to compensate for the subjectively perceived productivity gap, each worker chooses an effort level lower than that attributed to others. The latter is estimated as the lowest effort that allows to pass the firm's monitoring test. Since rational agents will not maintain expectations which turn out to be systematically wrong, we introduce a "consistency requirement for false beliefs". Accordingly, predictions based on the "wrong" model must agree with the observations of the "true" model. We show that even with consistency, less effort is supplied than in the full information setting. Hence, the wage-effort relationship gets less efficient from the firm's viewpoint. At a first sight, at the firm-level workers gain from holding false beliefs, while profits unambigously fall. At the aggregate market outcome, however, the firms' labor demand declines, total output falls, and the rate of unemployment rises, decreasing workers utility again.

Journal

Quality & QuantitySpringer Journals

Published: Sep 30, 2004

References

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