Intermediated Asymmetric Information, Compensation, and Career Prospects

101 Pages Posted: 3 Mar 2020

See all articles by Ron Kaniel

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Dmitry Orlov

University of Wisconsin School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2020

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 undervaluation of their skill. Agents’ track record gradually reduces the intermediary’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 retained agents accept below-reservation wages to build a reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offsets expropriation costs. We derive implications of this mechanism for pay-for-performance sensitivity, bonuses, and turnover. Our analysis applies to professions where talent is essential, and performance is publicly observable, such as asset management, legal partnerships, and accounting firms.

Keywords: dynamic signaling, dynamic adverse selection, compensation, career concerns, real options

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

Suggested Citation

Kaniel, Ron and Orlov, Dmitry, Intermediated Asymmetric Information, Compensation, and Career Prospects (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3532128 or http://dx.doi.org/10.2139/ssrn.3532128

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Dmitry Orlov (Contact Author)

University of Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://https://wsb.wisc.edu/directory/faculty/dmitry-orlov

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