Creator: Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 225 Abstract:
A model of a labor market is developed in which agents possess private information about their own productivities. This has the property that firms may use unemployment to create appropriate self-selection incentives. When this is the case, existence of an equilibrium may require that employment be stochastic. This is true even though all uncertainty is necessarily resolved prior to hiring. Even when existence is not at issue, it may be privately as well as socially desirable to randomize employment prospects. Finally, it is argued that this "adverse selection" approach is consistent with traditional "Keynesian" approaches to macroeconomics, but avoids some of the arbitrary features of several "Keynesian models."
Keyword: Randomized employment, Private information, Random employment, and Labor Subject (JEL): J64 - Unemployment: Models, Duration, Incidence, and Job Search and D83 - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness