Selecting the Best: The Persistent Effects of Luck
Mikhail Drugov, Margaret Meyer, and Marc Möller
CEPR Discussion Paper 19309
This paper contributes to the debate about the role of luck for individual success, a debate that shapes the perception of economic inequality and preferences over redistributive policies. We consider an organization aiming to select the more able of two competing agents. Selection is based on coarsely-measured performance reflecting unobservable ability, privately-chosen effort, and noise. We show that, even when noise swamps ability differences, optimally designed talent-selection processes favor early strong performers, thus making early luck persistent and, under mild conditions on noise, making early luck more important for selection than late luck. Organizational selection also affects the persistence of luck associated with agents’ observable identities: we show that identity-dependent selection processes, such as gender-specific mentoring, create incentives that make selection not only more efficient but also more equitable. Our theory offers testable predictions about the effects of job characteristics on the persistence of both types of luck.
The Effect of Occupational Choice and Stereotypes on Labor Market Sorting
Oleg Muratov and Marc Möller
We incorporate competition for jobs into an assignment model to investigate the implications of occupational choice for the matching between heterogeneous workers and jobs of differing quality. When occupational choice is without frictions, more able workers choose more (costly) education and workers sort across occupations in a way that induces positive assortative matching. We characterize the distortions that arise when entry into an occupation is costly for a group of workers, e.g. due to the existence of stereotypes. The associated utility-loss is increasing with a worker’s ability because, although high-ability workers obtain jobs of similar quality as in the absence of stereotypes, competition for those jobs turns out to be stronger.
Common Ownership and Intertemporal Price Discrimination
Patrick Arnold, Marc Möller, and Makoto Watanabe
This paper considers the effects of common ownership on markets featuring intertemporal price discrimination (e.g. airline industry). We argue that allocation-effects, i.e. the effect of common ownership on the intertemporal allocation of sales, are key to understand whether common ownership is anti-competitive and whether price-dispersion can serve as a measure of competitive conduct. Our theory identifies advance purchase markets as a setting where common ownership can have positive effects on both welfare and consumer surplus.
Procuring New Ideas: The Value of Performance Information in Innovation Tournaments
Martina Bossard, Marc Möller, and Catherine Roux
We use a stylized model of a dynamic innovation tournament to show that the effectiveness of monetary incentives depends on whether contestants receive cardinal, ordinal, or no information about their rival’s performance. The model’s main implication is that performance information acts as a substitute for prize money in creating incentives to invest in new ideas: The investment-maximizing information policy switches from no to ordinal to cardinal information as the tournament’s prize is reduced. A laboratory experiment provides support for our theory but also unveils an unpredicted pattern of behavior capable of overturning the model’s conclusions concerning optimal policy.