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Adverse Selection in an Efficiency Wage Model with Heterogeneous Agents


  • Ricardo Azevedo Araujo

    (University of Brasilia (UnB), Brazil)

  • Adolfo Sachsida

    (Brazilian Institute for Applied Economic Research (IPEA) and IBMEC-DF, Brazil)


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.

Suggested Citation

  • Ricardo Azevedo Araujo & Adolfo Sachsida, 2010. "Adverse Selection in an Efficiency Wage Model with Heterogeneous Agents," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 11(3), pages 495-503.
  • Handle: RePEc:anp:econom:v:11:y:2010:i:3:495_503

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    More about this item


    Efficiency Wages; Adverse Selection; Asymmetric Information;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • M59 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Other


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