Competitive Search Equilibrium with Asymmetric Information
Robert Shimer (Chicago)
and Randall Wright
(Penn)
This paper explores the behavior of a model
economy with search frictions and bilateral asymmetric information. Firms
commit to employment contracts in an effort to attract workers. When a worker
and firm meet, the worker must decide whether to supply effort to the
employment relationship, thereby affecting the distribution of a match-specific
productivity shock. Only the worker observes her effort choice and only the
firm observes the realization of the shock. We prove that under a standard
regularity condition, employment contracts take a simple form: the firm pays a
wage w to a worker who is hired and a severance payment b to a worker who is
dismissed. The firm hires the worker if
her productivity exceeds w - b, while the gap between the wage and the
severance payment is high enough to ensure that the worker supplies effort to
the employment relationship. Asymmetric information unambiguously reduces the
vacancy-unemployment ratio and reduces the probability that a meeting results
in a match. These results are consistent with earlier findings in the implicit
contracts literature, although the precise mechanism is somewhat different. For
example, there is no risk-sharing motive in this framework; and mobility restrictions
are explicitly caused by a primitive search friction.