Published in
HERO working paper series
Abstract
Work contributes to people's self-image in important ways. We propose a model in which individuals have a preference for being important to others. This leads to the following predictions:
1) In fully competitive markets with performance pay, behavior coincides with the standard model (bakers).
2) In jobs where effort is not rewarded according to its social marginal value, behavior is more socially beneficial than predicted by the standard model (nurses).
3) Even if unemployment benefits provide full income compensation, many workers' utility strictly decreases when losing their job.
4) Similarly, many workers will prefer to work rather than to live of welfare, even with full income compensation.
5) To keep shirkers out of the public sector, nurses' wages must be strictly lower than private sector income. At this wage level, however, the public sector will be too small.
6) It is possible to attract motivated workers to the public sector, without simultaneously attracting shirkers, through capital input improving nurses' opportunity to do a good job.