Intermediated Asymmetric Information, Compensation, and Career Prospects

Abstract

Adverse selection harms workers but benefits firms able to identify talent. An informed intermediary expropriates its agents’ ability by threatening to fire and expose them to the undervaluation of their skill. An agent’s track record gradually reduces the intermedi- ary’s information advantage. We show that, in response, the intermediary starts churning well-performing agents she knows to be less skilled. Despite leading to an accelerated reduction in information advantage, such selectivity boosts profits as the retained agent accepts below-reservation wages to build a reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building a reputation faster out- weigh expropriation costs. We derive implications of this mechanism for compensation, turnover, and promotions. Our analysis applies to professions where talent is essential and performance is publicly observable, which fits well with professional services firms such as consulting, finance, law, and accounting.

Keywords: personnel economics, dynamic signaling, career concerns, real options

JEL Classification: J41, D82, D83, D86, G20, M51, M52, M53, M55