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Involuntary Layoffs in a Model with Asymmetric Information Concerning Worker Ability

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  • Derek Laing

Abstract

This paper examines the contract between a risk-neutral firm and its risk-averse employees, assuming that worker ability is privately learned by the firm after a period of employment. Employers in an external spot labour market attempt to infer worker quality from the observable actions taken by the firm (such as the number of workers it lays off). The threat of spot market raids distorts the optimal contract. Layoffs may be involuntary and can exceed efficient levels. A seniority layoff rule may be included in the contract to avoid the adverse selection problems that arise if layoffs are conducted on the basis of ability.

Suggested Citation

  • Derek Laing, 1994. "Involuntary Layoffs in a Model with Asymmetric Information Concerning Worker Ability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 375-392.
    • Handle: RePEc:oup:restud:v:61:y:1994:i:2:p:375-392.
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    Citations

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    Cited by:

    1. MacLeod, W. Bentley, 2011. "Great Expectations: Law, Employment Contracts, and Labor Market Performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 18, pages 1591-1696, Elsevier.
    2. Wagner, Alexander F., 2011. "Relational contracts when the agent's productivity inside the relationship is correlated with outside opportunities," CEPR Discussion Papers 8378, C.E.P.R. Discussion Papers.
    3. Daniel Ferreira & Radoslawa Nikolowa, 2015. "Misallocation of Talent in Competitive Labor Markets," Working Papers 740, Queen Mary University of London, School of Economics and Finance.
    4. Tranaes, Torben, 2001. "Raiding Opportunities and Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 773-798, October.
    5. Luojia Hu & Christopher Taber, 2011. "Displacement, Asymmetric Information, and HeterogeneousHuman Capital," Journal of Labor Economics, University of Chicago Press, vol. 29(1), pages 113-152, January.
    6. Alma Cohen, 2012. "Asymmetric Learning in Repeated Contracting: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 419-432, May.
    7. Limor Golan, 2005. "Counteroffers and Efficiency in Labor Markets with Asymmetric Information," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 373-393, April.
    8. Heather Berry, 2017. "Managing valuable knowledge in weak IP protection countries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(7), pages 787-807, September.
    9. Canegallo, Claudia, 1999. "Funzionamento del mercato del lavoro in presenza di informazione asimmetrica. Una rassegna della letteratura," POLIS Working Papers 8, Institute of Public Policy and Public Choice - POLIS.
    10. Ferreira, Daniel & Nikolowa, Radoslawa, 2017. "Adverse Selection and Assortative Matching in Labor Markets," CEPR Discussion Papers 11869, C.E.P.R. Discussion Papers.
    11. Amankwah-Amoah, Joseph, 2017. "Human Capital Flows in Failing Organizations: An Integrated Conceptual Framework," MPRA Paper 80781, University Library of Munich, Germany.
    12. YOKOYAMA, Izumi & 横山, 泉 & OBARA, Takuya & 小原, 拓也, 2015. "Optimal Combination of Wage Cuts and Layoffs: The Unexpected Side Effect of a Performance-based Payment System," Discussion Papers 2015-07, Graduate School of Economics, Hitotsubashi University.
    13. Tan, Danchi & Mahoney, Joseph T., 2002. "An Empirical Investigation of Expatriate Utilization: Resource-Based, Agency, and Transaction Costs Perspectives," Working Papers 02-0129, University of Illinois at Urbana-Champaign, College of Business.
    14. Burguet, Roberto & Caminal, Ramon & Matutes, Carmen, 1999. "Golden Cages for Showy Birds: Optimal Switching Costs in Labour Markets," CEPR Discussion Papers 2070, C.E.P.R. Discussion Papers.
    15. Amankwah-Amoah, Joseph, 2020. "Talent Management and Global Competition for Top Talent: A Co-Opetition-Based Perspective," MPRA Paper 101113, University Library of Munich, Germany.
    16. Jin Li & Jun Yu, 2017. "A Theory Of Turnover And Wage Dynamics," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 223-236, January.
    17. Nakamura, Emi, 2008. "Layoffs and lemons over the business cycle," Economics Letters, Elsevier, vol. 99(1), pages 55-58, April.
    18. Burguet, Roberto & Caminal, Ramon & Matutes, Carmen, 2002. "Golden cages for showy birds: Optimal switching costs in labor contracts," European Economic Review, Elsevier, vol. 46(7), pages 1153-1185, July.
    19. Núria Rodríquez-Planas, 2011. "Displacement, Signaling, and Recall Expectations," Working Papers 550, Barcelona School of Economics.
    20. Daniel Ferreira & Radoslawa Nikolowa, 2023. "Talent Discovery and Poaching Under Asymmetric Information," The Economic Journal, Royal Economic Society, vol. 133(649), pages 201-234.
    21. Li, Jin, 2013. "Job mobility, wage dispersion, and technological change: An asymmetric information perspective," European Economic Review, Elsevier, vol. 60(C), pages 105-126.
    22. Waldman, Michael, 1996. "Asymmetric learning and the wage/productivity relationship," Journal of Economic Behavior & Organization, Elsevier, vol. 31(3), pages 419-429, December.
    23. Izumi Yokoyama & Takuya Obara, 2017. "Optimal combination of wage cuts and layoffs—the unexpected side effect of a performance-based payment system," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-15, December.
    24. Daniel Ferreira & Radoslawa Nikolowa, 2015. "Misallocation of Talent in Competitive Labor Markets," Working Papers 740, Queen Mary University of London, School of Economics and Finance.

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