Discussion Paper Details

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Title: Adverse Selection and Assortative Matching in Labor Markets

Author(s): Daniel Ferreira and Radoslawa Nikolowa

Publication Date: February 2017


Programme Area(s): Financial Economics and Labour Economics

Abstract: 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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Bibliographic Reference

Ferreira, D and Nikolowa, R. 2017. 'Adverse Selection and Assortative Matching in Labor Markets'. London, Centre for Economic Policy Research.