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Informational Externalities in the Labour Market and Their Implications for the Duration of Unemployment


  • Ben Lockwood


This paper considers a matching model of the labour market where firms can get partial information about workers by testing them prior to hiring them. It is shown that firm's hiring decisions generate several external effects. The first is that by testing the average productivity of workers in the unemployment pool is lowered, which may lead to non-existence of equilibrium. The second is an informational externality; with testing, workers of different ability exit unemployment at different rates, and so unemployment duration is a signal of productivity. It is shown that in equilibrium, firm may wish to condition on duration, only hiring those workers whose duration is below a critical value. Equilibrium is generally inefficient, with too much testing, and too low a critical value for duration.

Suggested Citation

  • Ben Lockwood, 1989. "Informational Externalities in the Labour Market and Their Implications for the Duration of Unemployment," Working Papers 740, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:740

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    References listed on IDEAS

    1. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    2. Larry Epstein & Massimo Marinacci, 2005. "Coarse Contingencies," RCER Working Papers 515, University of Rochester - Center for Economic Research (RCER).
    3. Gajdos, T. & Hayashi, T. & Tallon, J.-M. & Vergnaud, J.-C., 2008. "Attitude toward imprecise information," Journal of Economic Theory, Elsevier, vol. 140(1), pages 27-65, May.
    4. Marie-Louise Vierø, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 104-130, May.
    5. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    6. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
    7. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    8. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    9. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    10. Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-577, May.
    11. Truman F. Bewley, 1986. "Knightian Decision Theory: Part 1," Cowles Foundation Discussion Papers 807, Cowles Foundation for Research in Economics, Yale University.
    12. repec:hal:journl:halshs-00130179 is not listed on IDEAS
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