Abstract
We experimentally analyze a lemons market with a labor-market framing. Sellers are referred to as “workers” and have the possibility to provide “employers” with costly but credible information about their “productivity”. Economic theory suggests that in this setup, unraveling takes place and a number of different types are correctly identified in equilibrium. While we do observe a substantial degree of information disclosure, we also find that unraveling is typically not as complete as predicted by economic theory. The behavior of both workers and employers impedes unraveling in that there is too little disclosure. Workers are generally reluctant to disclose their private information, and employers enforce this behavior by bidding less competitively if workers reveal compared to the case where they conceal information.
Highlights
Information asymmetries are fundamentally important for many markets
We find that introducing employers as human players promotes the early steps of unraveling but dampens later ones
Employers are able to extract a positive rent if the worker discloses her productivity, but they are unable to do so if the worker does not disclose her private information
Summary
Information asymmetries are fundamentally important for many markets. In the labor market, firms seek to hire outstanding employees, but there is no way they can accurately predict which candidates will turn out best. A different example relates to the labor market Online services such as www.mybackgroundcheck.com enable applicants to provide potential employers with verified information on their personal background. Heidhues and KĹszegi [8] derive a similar result in a different context Experimental studies such as Benndorf and Normann [9] or Schudy and Utikal [10] show that subjects often do have a positive valuation of privacy and disclosing personal information will directly affect their utility. Employers are able to extract a positive rent if the worker discloses her productivity, but they are unable to do so if the worker does not disclose her private information These (unpredicted) profits of the employers may be interpreted as an additional cost of revelation which causes the unraveling process to stop earlier than the standard model suggests. Some examples of experimental studies on cheap talk include [19,20]
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