Citation

Discussion Paper Details

Please find the details for DP14586 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Intermediated Asymmetric Information, Compensation, and Career Prospects

Author(s): Ron Kaniel and Dmitry Orlov

Publication Date: April 2020

Keyword(s): career concerns, Compensation, Dynamic adverse selection, Dynamic signaling and real options

Programme Area(s): Financial Economics, Industrial Organization and Labour Economics

Abstract: Adverse selection harms workers, but benefits firms able to identify talent. An informed intermediary expropriates its agents' ability by threatening to fire and expose them to undervaluation of their skill. An agent's track record gradually reduces the intermediary's information advantage. We show that in response, the intermediary starts churning well-performing agents she knows to be less skilled. Despite leading to an accelerated reduction in information advantage, such selectivity boosts profits as retained agents accept below-reservation wages to build a reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offsets expropriation costs. We derive implications of this mechanism for pay-for- performance sensitivity, bonuses, and turnover. Our analysis applies to professions where talent is essential, and performance is publicly observable, such as asset management, legal partnerships, and accounting firms.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14586

Bibliographic Reference

Kaniel, R and Orlov, D. 2020. 'Intermediated Asymmetric Information, Compensation, and Career Prospects'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14586