Competitive Pressure and Lying in Search Markets

Matthew Baker () and Ingmar Nyman ()
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Ingmar Nyman: Hunter College, http://econ.hunter.cuny.edu/people/economics-faculty/inyman/

No 426, Hunter College Department of Economics Working Papers from Hunter College: Department of Economics

Abstract: We study a labor market in which principals and agents must search for a trading partner, and agents have private information about the value of a match. We show that competitive pressure can induce agents to lie and overstate the value of the match. This leads to insufficient frictional unemployment and search, and lower average utility. The resulting social loss increases with the accuracy of the private information and the ease with which matches are created, and decreases with the time-value of money. An unemployment subsidy can eliminate the inefficiency. Changing how the surplus is split between principal and agent, by contrast, has no effect on the agents’ incentive to lie.

Keywords: Search; Private Information; Competition (search for similar items in EconPapers)
JEL-codes: D82 D83 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-dge and nep-pke
Date: Written
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Persistent link: http://EconPapers.repec.org/RePEc:htr:hcecon:426

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