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Risk and Unraveling in Labor Markets

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  • Bos, Olivier
  • Ranger, Martin

Abstract

A two period labor market is considered in which workers’ quality is revealed in the second period. A signal – revealed to either workers, firms or both at the beginning of the first period – is correlated with the final quality. Under all assumptions about the distribution of information in the first period there exists an equilibrium in which firms only make offers in the second period and workers accept no offer in the first period. Nonetheless, early contracting is also an equilibrium if certain conditions on preferences of firms and workers are met. Workers have to be risk averse or firms risk loving with respect to expectations appropriate to the relevant information structure. Thus the conditions for unraveling depend on the information available to the two sides of the market.

Suggested Citation

  • Bos, Olivier & Ranger, Martin, 2016. "Risk and Unraveling in Labor Markets," MPRA Paper 74785, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:74785
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    References listed on IDEAS

    as
    1. Halaburda, Hanna, 2010. "Unravelling in two-sided matching markets and similarity of preferences," Games and Economic Behavior, Elsevier, vol. 69(2), pages 365-393, July.
    2. Muriel Niederle & Alvin E. Roth, 2009. "Market Culture: How Rules Governing Exploding Offers Affect Market Performance," American Economic Journal: Microeconomics, American Economic Association, vol. 1(2), pages 199-219, August.
    3. Fainmesser, Itay P., 2013. "Social networks and unraveling in labor markets," Journal of Economic Theory, Elsevier, vol. 148(1), pages 64-103.
    4. Ettore Damiano & Hao Li & Wing Suen, 2005. "Unravelling of Dynamic Sorting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(4), pages 1057-1076.
    5. Li, Hao & Rosen, Sherwin, 1998. "Unraveling in Matching Markets," American Economic Review, American Economic Association, vol. 88(3), pages 371-387, June.
    6. Hao Li & Wing Suen, 2004. "Self-Fulfilling Early-Contracting Rush," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 301-324, February.
    7. Michael Ostrovsky & Michael Schwarz, 2010. "Information Disclosure and Unraveling in Matching Markets," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 34-63, May.
    8. Gary S. Becker, 1981. "A Treatise on the Family," NBER Books, National Bureau of Economic Research, Inc, number beck81-1, July.
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    10. Wing Suen, 2000. "A Competitive Theory of Equilibrium and Disequilibrium Unravelling in Two-Sided Matching," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 101-120, Spring.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Unraveling; Risk Aversion; Asymmetric Information;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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