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Interpretive Evaluation: E↵ects of Confirmation Bias on the Retribution to Talent

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  • Marcelo Denis Woo

Abstract

This work studies the e↵ects of confirmation bias on the retribution to unobservable talent in a competitive labor market. Under evaluation with confirmatory-bias, the candidate always exerts a positive level of ef- fort to influence information, but e↵ort decreases over time, converging to zero. While Bayesian beliefs converge at linear rate t to the true tal- ent, confirmatory-biased beliefs converge at an exponential rate 2t to a weighted average between talent and the initial prejudice. If initial beliefs are biased, then for any prior precision h0 > 0, confirmation-biased wages never converge to the talent, so the Retribution Bias is persistent, even with ad infinitum optimal signalling by the candidate. Thus, confirmation bias becomes a new source of market ine ciency, of persistent nature. The Retribution Bias increases in the initial prejudice gap and in the relative prior-to-signal precision h0/h". For the case when the market conditions initial beliefs on observable characteristics (e.g., gender, ethnicity), we analyze di↵erent measures of bias in retribution relative to individual tal- ent. The inter-individual wage gap, commonly used in public discussion, reflects both an inter-group prejudice gap and an inter-individual talent gap, and therefore is a confounding and inconclusive measure of group- based biases. A more appropriate measure of the inter-group prejudice gap is the Retribution Bias Gap, since it is orthogonal to -and therefore controls for- the inter-individual talent gap.

Suggested Citation

  • Marcelo Denis Woo, 2019. "Interpretive Evaluation: E↵ects of Confirmation Bias on the Retribution to Talent," Asociación Argentina de Economía Política: Working Papers 4207, Asociación Argentina de Economía Política.
  • Handle: RePEc:aep:anales:4207
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    References listed on IDEAS

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    1. Gibbons, Robert & Murphy, Kevin J, 1992. "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 468-505, June.
    2. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
    3. Matthew Rabin & Joel L. Schrag, 1999. "First Impressions Matter: A Model of Confirmatory Bias," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(1), pages 37-82.
    4. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 169-182.
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    Cited by:

    1. An-Chi Wu & Duc-Dinh Kao, 2022. "Mapping the Sustainable Human-Resource Challenges in Southeast Asia’s FinTech Sector," JRFM, MDPI, vol. 15(7), pages 1-26, July.

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J7 - Labor and Demographic Economics - - Labor Discrimination

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