Working Paper: NBER ID: w29445
Authors: John J. Horton; Ramesh Johari; Philipp Kircher
Abstract: In a labor market model with cheap talk, employers can send messages about their willingness to pay for higher-ability workers, which job-seekers can use to direct their search and tailor their wage bid. Introducing such messages leads—under certain conditions—to an informative separating equilibrium that affects the number of applications, types of applications, and wage bids across firms. This model is used to interpret an experiment conducted in a large online labor market: employers were given the opportunity to state their relative willingness to pay for more experienced workers, and workers can easily condition their search on this information. Preferences were collected for all employers but only treated employers had their signal revealed to job-seekers. In response to revelation of the cheap talk signal, job-seekers targeted their applications to employers of the right “type,” and they tailored their wage bids, affecting who was matched to whom and at what wage. The treatment increased measures of match quality through better sorting, illustrating the power of cheap talk for talent matching.
Keywords: cheap talk; market design; labor market; directed search
JEL Codes: J01; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cheap talk messages (C79) | communication of willingness to pay (D44) |
| communication of willingness to pay (D44) | jobseekers tailor search and wage bids (J68) |
| jobseekers tailor search and wage bids (J68) | better sorting and improved match quality (L15) |
| cheap talk messages (C79) | increase in total transaction volume (F69) |
| revelation of employer preferences (J29) | jobseekers avoiding low-willingness-to-pay firms (J68) |
| revelation of employer preferences (J29) | who is matched to whom and at what wage (J31) |
| cheap talk messages (C79) | improved market outcomes (D47) |