The Value of Education

In this experiment, some of you will be potential employees and others employers. Each employer can hire only one employee. If you’ve hired an employee, the employee produces output according to his or her type (more on this later). For each unit of output produced, the employer makes $100,000. The only costs to the employer are wage payments to the employee, which are agreed to in a competitive auction.

As an employee, you have a “type” which is known only to you. There are two types of employees: “low productivity” types, who produce exactly 1 unit of output when employed by any firm and “high productivity” employees, who produce exactly two units of output. As an employee, your type depends on the month in which you were born. If the oldest member of your team was born in an odd numbered month, i.e., January, March, May, etc., you are a low type; otherwise you are a high type. Your type is known only to you and not to anyone else. Please do not disclose it.

Prior to going on the job market, you need to decide on a level of education to attain. There are three possible levels of education: MBA, BS, and none. The cost to getting no education is zero. Your cost to getting a BS or an MBA depends on your type. Everyone pays $80,000 for a BS and $160,000 for an MBA. High types get a rebate equal to half of their education costs back at the end of the game. Low types get no rebate. Note that your education has nothing to do with your productivity in the workplace.

After employees complete their education, this information is publicly revealed and the job market opens. Employers are free to make offers for employees with differing levels of educational attainment. Likewise, employees are free to ask for various wages. Any outstanding offer can be accepted by someone on the other side of the market.

When no employers or employees wish to trade in the market, payoffs are realized. As an employee who is hired, your payoff is your wage less your education costs plus rebates (if any). As an employer, your payoff is $100,000 times the number of units of output produced by your employee less wage costs.