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Adverse Selection and Assortative Matching in Labor Markets

Listed author(s):
  • Ferreira, Daniel
  • Nikolowa, Radoslawa

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11869.

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Date of creation: Feb 2017
Handle: RePEc:cpr:ceprdp:11869
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