Patrick Legros, Andrew Newman
Publication year: 2001

We compare the welfare and equity properties of two compensation rules for university professors; a laissez-faire policy where universities are free to discriminate between professors of different quality and an equity based compensation where wages must be equalised inside a university. In terms of matching inside universities, the laissez-faire equilibrium involves heterogeneity of types while the other policy leads to segregation. Laissez-faire is always more efficient in terms of surplus and total output. More surprisingly the ex-pst distribution of wages can be more unequal under the “equity based” compensation than under laissez-faire. This illustrates some possibly unintended consequences of well meaning policy makers’ and university administrators’ attempts to maintain equity.

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