DP6837 Interviews and Adverse Selection

Author(s): Jens Josephson, Joel Shapiro
Publication Date: May 2008
Keyword(s): Asymmetric Information, Decentralized Labour Markets, Interview costs, Matching, Professional Labour Markets
JEL(s): D82, J21, J44
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6837

Interviewing in professional labour markets is a costly process for firms. Moreover, poor screening can have a persistent negative impact on firms' bottom lines and candidates' careers. In a simple dynamic model where firms can pay a cost to interview applicants who have private information about their own ability, potentially large inefficiencies arise from information-based unemployment, where able workers are rejected by firms because of their lack of offers in previous interviews. This effect may make the market less efficient than random matching. We show that the first best can be achieved using either a mechanism with transfers or one without transfers.