Counteroffers and Efficiency in Labor Markets with Asymmetric Information

Abstract

This article considers the effect of offer matching on labor market outcomes when the current employer has better information about his worker’s productivity than potential employers. Previous research found that when current employers have better information than potential employers, the latter use job assignment to infer an employed worker’s qualifications. As a result, assignment of workers to jobs is inefficient. I find that when current employers can match outside offers, the equilibrium outcome may be efficient. I analyze the effect of the asymmetric information on investment in human capital made by employers and workers, and find these investment levels to be first best.

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