Screening Workers for Ability and Motivation

We study the screening problem of a firm that hires workers without knowing their ability or their intrinsic motivation. We completely characterise the set of optimal contracts (consisting of observable effort levels and non-linear salaries) that depend on how workers’ heterogeneity in ability relates to the heterogeneity in motivation. Accordingly, optimal contracts differ as to whether ability or motivation prevails in determining workers’ performance. We show that full separation and full participation of workers’ types is always implemented, when feasible, because it is preferred by the firm to either pooling or excluding some workers. Moreover, when ability prevails, there exist full screening contracts such that motivated workers are asked to provide the efficient level of effort, and such that the firm pays low information rents to its workers. Despite this fact, the firm makes higher profits when motivation rather than ability prevails because of labour donations from motivated worker