Intermediated Asymmetric Information, Compensation and Career Prospects

Kaniel, Ron; Orlov, Dmitry

doi:10.1257/aer.20200169

Abstract

Adverse selection benefits firms able to identify talent. An informed intermediary expropriates agents' ability by threatening to fire and expose them to undervaluation of their skill. An agent's track record gradually reduces intermediary's information advantage. In response, the intermediary starts churning well-performing agents she knows are less skilled. The accelerated reduction in information advantage boosts profits, as retained agents accept below-reservation wages to build reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offset expropriation costs. Our analysis applies to professions where talent is essential, and performance is publicly observable.

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