Career concerns and optimal disclosure policy
Sequential contracting with multiple employers is a common feature of modern labor markets. Employment relations often terminate due to raids. When a worker is raided, the initial employer may enjoy an informational advantage over the raiders, as she is likely to have better information on the quality of her worker. If the worker has career concerns, and matching between firms and workers is important, the initial employer can strategically disclose this information to influence the worker's current incentives and matching efficiency. I show that, if the initial employer can use long-term complete contracts where she can commit to a second-period wage and severance payment, perfect competition in the raider market will ensure full information disclosure. In contrast, an optimal short-term contract induces full disclosure if i) the worker is risk neutral, ii) the worker does not face any liquidity constraints, and iii) the raider market is perfectly competitive. A partial converse of these results is also provided. By relaxing any of the above conditions, one can find situations where full disclosure is no longer optimal.
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Evanston, Ill. : Center for the Study of Industrial Organization at Northwestern Univ.