Adverse Selection and Assortative Matching in Labor Markets
Daniel Ferreira and
Radoslawa Nikolowa ()
No 11869, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We show that adverse selection in the labor market may generate negative assortative matching of workers and firms. In a model in which employers asymmetrically learn about the ability of their workers, high-productivity firms poach mediocre workers, whereas low-productivity firms retain high-ability workers. We show that this flipping property is caused by information asymmetry alone. Our model has a number of positive and normative predictions: External promotions are not an indication of high talent, within-job wage growth is higher in industries with more revenue dispersion, and non-compete clauses are inefficient in industries with significant firm heterogeneity.
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