Essays in academic specialization and career incentives

The first chapter studies academic specialization and misallocation of skills in the labor market. I develop a general equilibrium version of the Roy model to study occupations where occupation-specific human capital is obtained through university education and people incur considerable upfront costs to work in a particular occupation. The model embeds a market failure: risk-averse individuals face an incomplete markets problem because they are not able to purchase insurance against adverse occupation-specific shocks. I compare production efficiency and utilitarian welfare in competitive equilibrium to the outcomes of two social planning problems: (i) unconstrained planning problem (ii) ‘constrained efficient’ planning problem. To get quantitative estimates of the importance of academic specialization, I calibrate the model using data on petroleum, chemical and mechanical engineers. The output loss caused by the lack of insurance depends on model parameters and can potentially be very large. The objective of the second chapter is to study career concerns in teams and the possibility of multiple equilibria. I use a information structure where only the joint output of the team, rather than signals for each team member, is observed by the principal. As opposed to the previous literature on the topic, I show the existence of multiple equilibria if either (i) the labor market exhibits increasing returns to perceived talent (ii) there is complementarity in hidden effort. In one equilibrium, both workers exert little effort and have bad career prospects. In the other equilibrium, both workers exert high effort and have good career prospects. I show that linear wage contracts will eliminate the bad equilibrium in case (i) but not in case (ii)