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Adverse Selection and Employment Cycles

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  • Montgomery, James D
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    Abstract

    This article examines a dynamic adverse-selection model that generates equilibrium employment cycles. In the model, firms hire workers from unemployment, observe workers' productivity through time, and (following the profit-maximizing rule) eventually fire unproductive workers. If hiring costs are low, the dynamical system converges to a steady state in which the unemployment pool contains mostly low-ability workers. However, if hiring costs are sufficiently large, this 'lemons effect' would make firms unwilling to hire workers. In this case, the system converges to a cyclical equilibrium in which firms alternate between hiring and not hiring. Copyright 1999 by University of Chicago Press.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Labor Economics.

    Volume (Year): 17 (1999)
    Issue (Month): 2 (April)
    Pages: 281-97

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    Handle: RePEc:ucp:jlabec:v:17:y:1999:i:2:p:281-97

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    Web page: http://www.journals.uchicago.edu/JOLE/

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    Cited by:
    1. Christopher L. House & Jing Zhang, 2012. "Layoffs, Lemons and Temps," NBER Working Papers 17962, National Bureau of Economic Research, Inc.
    2. Robert E. Hall, 2005. "The Amplification of Unemployment Fluctuations through Self-Selection," NBER Working Papers 11186, National Bureau of Economic Research, Inc.
    3. Renato Faccini, 2007. "Unemployment and Within-Group Wage Inequality: Can Information Explain the Trade-Off?," Economics Working Papers ECO2007/14, European University Institute.
    4. Modesto, Leonor, 2004. "Unions, Firing Costs and Unemployment," IZA Discussion Papers 1157, Institute for the Study of Labor (IZA).
    5. Canziani, Patrizia & Petrongolo, Barbara, 2001. "Firing costs and stigma: A theoretical analysis and evidence from microdata," European Economic Review, Elsevier, vol. 45(10), pages 1877-1906, December.
    6. Adriana D. Kugler & Gilles Saint Paul, 2000. "Hiring and firing costs, adverse selection and long-term unemployment," Economics Working Papers 447, Department of Economics and Business, Universitat Pompeu Fabra.

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