Counteroffers and Efficiency in Labor Markets With Asymmetric Information

This paper considers the effect of offer matching on labor market outcomes when the current employer has better information about his worker’s productivity than potential employers. Previous research found that when current employers have better information than potential employers, the later use job assignment to infer an employed worker’s qualifications. As a result, assignment of workers to jobs is inefficient. I find that when current employers can match outside offers the equilibrium outcome may be efficient despite the asymmetric information. I then analyze the effect of the asymmetric information on investment in human capital made by employers and workers, and find these investment levels to be first best. 5000 Forbes Avenue, Pittsburgh, PA 15213. Email: [email protected]. I am grateful to John Kennan, Derek Neal, and Peter Norman for guidance and encouragement. I thank Hiromi Nosaka, Larry Samuelson, Michael Waldman, James Walker and the seminar participants at the University of Wisconsin for useful comments and discussions. This paper is a revised version of the first chapter in my Ph.D. dissertation at Wisconsin.