Outplacement as Endogenous Adverse Selection

Research Seminars

When things do not work out, firms often help their employees find alternative employment. Little such help is provided for employees that firms wish to retain. Such behavior arises as an optimal solution to an information design problem. Workers agree to this kind of endogenous information friction, which transfers surplus efficiently, to pay for efficient training. This information structure creates adverse selection but differently for retained and released workers. It implies that wages for retained workers will be lower on average than for released workers, in contrast to a standard approach for testing for adverse selection in the labour market.