Rational Inattention in Hiring Decisions

51 Pages Posted: 15 Feb 2019

See all articles by Sushant Acharya

Sushant Acharya

Federal Reserve Banks - Federal Reserve Bank of New York

Shu Lin Wee

Carnegie Mellon University, Tepper School of Business

Date Written: February 2019

Abstract

We provide an information-based theory of matching efficiency fluctuations. Rationally inattentive firms have limited capacity to process information and cannot perfectly identify suitable applicants. During recessions, higher losses from hiring unsuitable workers cause firms to be more selective in hiring. When firms cannot obtain sufficient information about applicants, they err on the side of caution and accept fewer applicants to minimize losses from hiring unsuitable workers. Pro-cyclical acceptance rates drive a wedge between meeting and hiring rates, explaining fluctuations in matching efficiency. Quantitatively, our model replicates the joint behavior of unemployment rates and matching efficiency observed since the Great Recession.

Keywords: rational inattention, hiring behavior, matching efficiency, composition of unemployed

JEL Classification: D8, E32, J63, J64

Suggested Citation

Acharya, Sushant and Wee, Shu Lin, Rational Inattention in Hiring Decisions (February 2019). FRB of New York Staff Report No. 878, Available at SSRN: https://ssrn.com/abstract=3334630 or http://dx.doi.org/10.2139/ssrn.3334630

Sushant Acharya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Shu Lin Wee

Carnegie Mellon University, Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://https://sites.google.com/site/shulinwee/

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