VJE Seminar: Heski Bar-Isaac (Univ. Toronto)
Adverse selection, efficiency and the structure of information, with application to labour markets
Heski Bar-Isaac (Univ. Toronto)
We explore how the structure of public and private information impact on efficiency and adverse selection in Akerlof’s (1970) Lemons model, extended to admit a matching component. Adverse selection is defined quantitatively as the difference in expected value of those who trade compared to the population at large, conditional on public information. In our employer learning context, this is also the amount by which wages are depressed by asymmetric information. For a fixed information structure, efficiency and adverse selection are co-monotone. Both depend on the realisation of information only through its effect on the public expectation of the worker’s match with the current employer, with adverse selection increasing and efficiency decreasing in this variable. Instead, comparing different information structures can allow expected adverse selection and efficiency both to increase. More generally, we parameterize Gaussian information structures and characterise the extent of adverse selection and efficiency that they can achieve. Under natural conditions, average wages are higher for the workers who leave than are retained when adverse selection is imposed (approximately) efficiently.
(joint work with Ian Jewitt and Clare Leaver)