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Adverse Selection, Efficiency and the Structure of Information

Heski Bar-Isaac (), Ian Jewitt and Clare Leaver

No 13007, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: Adverse Selection; asymmetric information; information design (search for similar items in EconPapers)
JEL-codes: D82 J30 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-lma and nep-mic
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Journal Article: Adverse selection, efficiency and the structure of information (2021) Downloads
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