Discussion paper

DP11869 Adverse Selection and Assortative Matching in Labor Markets

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.


Ferreira, D and R Nikolowa (2017), ‘DP11869 Adverse Selection and Assortative Matching in Labor Markets‘, CEPR Discussion Paper No. 11869. CEPR Press, Paris & London. https://cepr.org/publications/dp11869