18.4 Problems Arising from Ignorance When Hiring

Asymmetric information is frequently a problem in labor markets. Prospective employees may have less information about working conditions than firms do. Firms may have less information about potential employees’ abilities than potential workers do.

Information asymmetries in labor markets lower welfare below the full-information level. Workers may signal and firms may screen to reduce the asymmetry in information about workers’ abilities. Signaling and screening may raise or lower welfare, as we now consider.

Cheap Talk

Honesty is the best policy—when there is money in it.

—Mark Twain

We now consider situations in which workers have more information about their ability than firms do. We look ...

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