Working Paper: CEPR ID: DP13007
Authors: Heski Barisaac; Ian Jewitt; Clare Leaver
Abstract: This paper explores how the structure of asymmetric information impacts on economic outcomes in Akerlof’s (1970) Lemons model applied to the labor market and extended to admit a matching component between worker and firm. For efficiency, only good matches should be retained. We characterize the nature of equilibrium and show that, for any Gaussian information structure, both adverse selection and efficiency depend on the realization of information only through the conditional expectation of match value given public information. We derive a parsimonious parameterization of all Gaussian information structures and establish comparative statics results. Using this framework, we address five natural questions. What is the effect of more public information? Which information structures impose adverse selection efficiently, and inefficiently? What is the effect of more private information? When is there positive selection into outside firms? When is the average wage of released workers higher than the average wage of retained workers?
Keywords: information design; adverse selection; asymmetric information
JEL Codes: D82; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive selection occurs (C52) | Average wages of released vs. retained workers (J63) |
| Conditional expected match quality given public information (D80) | Probability of trade (F17) |
| Conditional expected match quality given public information (D80) | Efficiency contribution (D61) |
| Increasing public information (H49) | Enhancing efficiency (D61) |
| Increasing public information (H49) | Adverse selection (D82) |
| More inside information (Y50) | Higher expected efficiency (D61) |