Asymmetric information and search frictions: A neutrality result

- A job search model with asymmetric information is presented.
- Some but not all firms observe worker ability.
- Wage dispersion neutralizes the effect of asymmetric information.
- The full information outcome may be implementable.
- Implementability depends on market parameters.

This paper integrates asymmetric information between firms into a canonical model of on-the-job search. Workers are heterogeneous in ability, but not all employers observe a worker's type. Wage dispersion caused by search frictions makes the equilibrium wage distribution insensitive to informational asymmetries. Hence, the equilibrium outcome may be the same as when a worker's ability is known to every firm. The supportability of the full information outcome depends on market parameters related to productivity, knowledge, and search. The theoretical results elucidate an empirical puzzle about demographic differences in asymmetric information between employers.