We survey the determinants of earnings and propose a framework for understanding labor market success. We suggest that the advantages of the children of successful parents go considerably beyond the benefits of superior education, the inheritance of wealth, or the genetic inheritance of cognitive ability. We suggest that noncognitive personality variables, such as attitudes towards risk, ability to adapt to new economic conditions, hard work, and the rate of time preference affect both earning and the transmission of economic status across generations.
Suppose there is a principal-agent relationship between employer and employee in which effort is not contractible, but is elicited through employer incentive mechanisms. We term preferences that allow the employer to elicit effort at lower cost incentive enhancing. We analyze how such preferences affect earnings, nd then provide evidence that one of the relevant behavioral traits, efficacy, as well as other psychological aspects of individuals, are significant influences on earnings. We conclude that measures of cognitive performance are not sufficient indicators of the effectiveness of schools in promoting student labor market success, incentive enhancing preferences are irreducibly heterogeneous, incentive enhancing preferences help explain the persistence of poverty over generations within families and, unlike cognitive skills, incentive-enhancing traits need not be welfare increasing for their bearers.
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