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Adverse Selection and Assortative Matching in Labor Markets

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  • Ferreira, Daniel
  • Nikolowa, Radoslawa

Abstract

We show that adverse selection in the labor market may generate negative assortative matching of workers and firms. In a model in which employers asymmetrically learn about the ability of their workers, high-productivity firms poach mediocre workers, whereas low-productivity firms retain high-ability workers. We show that this flipping property is caused by information asymmetry alone. Our model has a number of positive and normative predictions: External promotions are not an indication of high talent, within-job wage growth is higher in industries with more revenue dispersion, and non-compete clauses are inefficient in industries with significant firm heterogeneity.

Suggested Citation

  • Ferreira, Daniel & Nikolowa, Radoslawa, 2017. "Adverse Selection and Assortative Matching in Labor Markets," CEPR Discussion Papers 11869, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11869
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