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Screening and Information-Sharing Externalities

Quitz\'e Valenzuela-Stookey

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Abstract: In many settings, multiple uninformed agents bargain simultaneously with a single informed agent in each of multiple periods. For example, workers and firms negotiate each year over salaries, and the firm has private information about the value of workers' output. I study the effects of transparency in these settings; uninformed agents may observe others' past bargaining outcomes, e.g. wages. I show that in equilibrium, each uninformed agent will choose in each period whether to try to separate the informed agent's types (screen) or receive the same outcome regardless of type (pool). In other words, the agents engage in a form of experimentation via their bargaining strategies. There are two main theoretical insights. First, there is a complementary screening effect: the more agents screen in equilibrium, the lower the information rents that each will have to pay. Second, the payoff of the informed agent will have a certain supermodularity property, which implies that equilibria with screening are "fragile" to deviations by uninformed agents. I apply the results to study pay-secrecy regulations and anti-discrimination policy. I show that, surprisingly, penalties for pay discrimination have no impact on bargaining outcomes. I discuss how this result depends on the legal framework for discrimination cases, and suggest changes to enhance the efficacy of anti-discrimination regulations. In particular, anti-discrimination law should preclude the so-called "salary negotiation defense".

Date: 2020-11
New Economics Papers: this item is included in nep-mic
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