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Asymmetric Information between Employers

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  • Kahn, Lisa B.

    ()
    (Yale University)

Abstract

Employer learning about workers' abilities plays a key role in determining how workers sort into jobs and are compensated. This study explores whether learning is symmetric or asymmetric, i.e., whether potential employers have the same information about worker ability as the incumbent firm. I develop a model of asymmetric learning that nests the symmetric learning case and allows the degree of asymmetry to vary, yielding testable implications for the prevalence of asymmetric learning. I then show how predictions in the model can be tested using compensation data. Using the NLSY, I test the model and find strong support for asymmetric information. I first exploit the fact that groups of workers differ in their variances in ability – based on economic conditions at time of entry into a firm – to show that incumbent wages track differences in ability distributions more closely than do outside firm wages. Second, I show that learning about ability is more symmetric for occupations that require more communication outside the firm. Finally, I show how to uncover the key parameter of interest in my model representing the degree to which information is asymmetric. My estimates imply that in one period, outside firms reduce the average expectation error over worker ability by roughly a third of the reduction made by incumbent firms. Thus outside firms retain sizeable expectation errors due to asymmetric information.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7147.

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Length: 60 pages
Date of creation: Jan 2013
Date of revision:
Publication status: published in: American Economic Journal: Applied Economics, 2013, 5 (4), 165-205
Handle: RePEc:iza:izadps:dp7147

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Related research

Keywords: asymmetric information; personnel economics; employer learning;

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References

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  1. Joshua C. Pinkston, 2009. "A Model of Asymmetric Employer Learning with Testable Implications," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 367-394.
  2. Henry S. Farber & Robert Gibbons, 1991. "Learning and Wage Dynamics," NBER Working Papers 3764, National Bureau of Economic Research, Inc.
  3. Michael Waldman, 1989. "Up-or-Out Contracts: A Signaling Perspective," UCLA Economics Working Papers 556, UCLA Department of Economics.
  4. Joseph G. Altonji & Charles R. Pierret, 1997. "Employer Learning and Statistical Discrimination," NBER Working Papers 6279, National Bureau of Economic Research, Inc.
  5. Milgrom, Paul & Oster, Sharon, 1987. "Job Discrimination, Market Forces, and the Invisibility Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 453-76, August.
  6. Daron Acemoglu & Jörn-Steffen Pischke, 1998. "Why Do Firms Train? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 78-118, February.
  7. Robert Gibbons & Lawrence F. Katz & Thomas Lemieux & Daniel Parent, 2005. "Comparative Advantage, Learning, and Sectoral Wage Determination," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 681-724, October.
  8. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
  9. Michael Waldman, 1983. "Job Assignments, Signalling nad Efficiency," UCLA Economics Working Papers 286, UCLA Department of Economics.
  10. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91 - 147.
  11. Kahn, Lisa B., 2010. "The long-term labor market consequences of graduating from college in a bad economy," Labour Economics, Elsevier, vol. 17(2), pages 303-316, April.
  12. Fabian Lange, 2007. "The Speed of Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 1-35.
  13. Bernhardt, Dan, 1995. "Strategic Promotion and Compensation," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 315-39, April.
  14. Chang, Chun & Wang, Yijiang, 1996. "Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 505-19, July.
  15. Bowlus, Audra J, 1995. "Matching Workers and Jobs: Cyclical Fluctuations in Match Quality," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 335-50, April.
  16. Greenwald, Bruce C, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 325-47, July.
  17. Kahn, Lisa B. & Lange, Fabian, 2010. "Employer Learning, Productivity and the Earnings Distribution: Evidence from Performance Measures," IZA Discussion Papers 5054, Institute for the Study of Labor (IZA).
  18. Uta Schönberg, 2007. "Testing for Asymmetric Employer Learning," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 651-691.
  19. Zabojnik, Jan & Bernhardt, Dan, 2001. "Corporate Tournaments, Human Capital Acquisition, and the Firm Size-Wage Relation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 693-716, July.
  20. Katz, Eliakim & Ziderman, Adrian, 1990. "Investment in General Training: The Role of Information and Labour Mobility," Economic Journal, Royal Economic Society, vol. 100(403), pages 1147-58, December.
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Citations

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Cited by:
  1. Emiko Usui & Seik Kim, 2013. "Employer Learning, Job Mobility, and Wage Dynamics," 2013 Meeting Papers 912, Society for Economic Dynamics.
  2. Bas Klaauw & António Dias da Silva, 2011. "Wage dynamics and promotions inside and between firms," Journal of Population Economics, Springer, vol. 24(4), pages 1513-1548, October.
  3. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," Discussion Paper Series, Department of Economics 201307, Department of Economics, University of St. Andrews, revised 14 Oct 2013.
  4. Oyer, Paul & Schaefer, Scott, 2011. "Personnel Economics: Hiring and Incentives," Handbook of Labor Economics, Elsevier.
  5. Mohrenweiser, Jens & Zwick, Thomas & Backes-Gellner, Uschi, 2013. "Poaching and firm-sponsored training: First clean evidence," ZEW Discussion Papers 13-037, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Valerie Smeets & Michael Waldman & Frederic Warzynski, 2013. "Performance, Career Dynamics, and Span of Control," Economics Working Papers 2013-02, School of Economics and Management, University of Aarhus.
  7. Gemus, Jonathan, 2010. "College Achievement and Earnings," Working Paper Series 2010:1, Uppsala University, Department of Economics.
  8. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
  9. Amanda Pallais, 2013. "Inefficient Hiring in Entry-Level Labor Markets," NBER Working Papers 18917, National Bureau of Economic Research, Inc.
  10. Néria Rodréguez-Planas, 2011. "Displacement, Signaling, and Recall Expectations," Working Papers 550, Barcelona Graduate School of Economics.
  11. Ian Jewitt & Clare Leaver & Heski Bar-Isaac, 2007. "Information and Human Capital Management," Economics Series Working Papers 367, University of Oxford, Department of Economics.
  12. Kahn, Lisa B. & Lange, Fabian, 2010. "Employer Learning, Productivity and the Earnings Distribution: Evidence from Performance Measures," IZA Discussion Papers 5054, Institute for the Study of Labor (IZA).
  13. Ján Zábojník, 2012. "Promotion tournaments in market equilibrium," Economic Theory, Springer, vol. 51(1), pages 213-240, September.

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