Journal of Labor Economics Vol. 17 No. 2 1999
Adverse Selection and Employment Cycles
Abstract
This article examines a dynamic adverse‐selection model that generates equilibrium employment cycles. In the model, firms hire workers from unemployment, observe workers' productivity through time, and (following the profit‐maximizing rule) eventually fire unproductive workers. If hiring costs are low, the dynamical system converges to a steady state in which the unemployment pool contains mostly low‐ability workers. However, if hiring costs are sufficiently large, this “lemons effect” would make firms unwilling to hire workers. In this case, the system converges to a cyclical equilibrium in which firms alternate between hiring and not hiring.
- DOI
- 10.1086/209921
- Volume
- 17
- Issue
- 2
- Pages
- 281-297
- Language
- en
- Sources
- openalex crossref