Productivity crowding-out in labor markets with motivated workers

When workers’ intrinsic motivation matters, a wage increase has mixed consequences on applicants’ productivity and motivation, as shown in public service, healthcare, education and politics. In a simple theoretical framework where ability and motivation are workers’ private information, we rationalize these differentiated responses and identify intuitive conditions for higher wages inducing self-selection of more (or less) productive and motivated workers. The selection patterns depend both on the statistical association between workers’ characteristics and on the difference between the incentivized returns to ability across sectors. We emphasize a crowding-out effect of wage on workers’ productivity that has not been analyzed in the theoretical literature before.