asymmetric information

Author
Abstract

This paper presents a model of final-offer arbitration that distinguishes
between the union rank and file and their negotiator. If the union negotiator
has better information than the rank and file with regard to the bargaining
enviroment and the negotiated wage depends not only on this enviroment but also
the effort exerted by the negotiator, then the rank and file may not be able to
tell whether a poor wage outcome resulted from a poor bargaining enviroment or
because the negotiator was shirking. This is the classic principal—agent problem
with asymmetric information.
Through contract design the union rank and file could elicit the correct
behavior from the negotiator without resort to arbitration. But, as is shown in
this paper, under certain circumstances the rank and file could do better by
having the union negotiator go to arbitration some of the time. In a two state,
model it is shown that arbitration will occur only in the ‘bad’ state (where the
bargaining enviroment is unfavorable to the union). Arbitration is more likely
to serve a useful purpose in contract design the less risk averse the rank and
file, the smaller the direct costs of arbitration to the union, the more likely
the ‘good’ state of nature and the more difficult it is to induce 'truth
telling‘ in the absence of arbitration.

Year of Publication
1988
Number
233
Date Published
06/1988
Publication Language
eng
Citation Key
7968
McCall, B. . (1988). Final Offer Arbitration and the Incentive to Bargain: A Principal-Agent Approach. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01k643b117v (Original work published June 1988)
Working Papers
Abstract

In this paper we provide theoretical and empirical analyses of an
asymmetric-information model of layoffs in which the current employer is
better informed about its workers’ abilities than prospective employers
are. The key feature of the model is that when firms have discretion with
respect to whom to lay off, the market infers that laid-off workers are of
low ability. Since no such negative inference should be attached to
workers displaced in a plant closing, our model predicts that the post-
displacement wages of otherwise observationally equivalent workers will be
higher for those displaced by plant closings than for those displaced by
layoffs. A simple extension of our model predicts that the post-
displacement unemployment duration of otherwise observationally equivalent
workers will be lower for those displaced by plant closings than for those
displaced by layoffs.
In our empirical work, we use data from the Displaced Workers Supplements
in the January l984 and 1986 Current Population Surveys. For our whole
sample, we find that the evidence (with respect to both re-employment wages
and post-displacement unemployment duration) is consistent with the idea
that laid-off workers are viewed less favorably by the market than are
those losing jobs in plant closings. Furthermore, our findings are much
stronger for workers laid-off from jobs where employers have discretion
over whom to lay off, and much weaker for workers laid-off from jobs where
employers have little or no discretion over whom to lay off.

Year of Publication
1989
Number
249
Date Published
04/1989
Publication Language
eng
Citation Key
Journal of Labor Economics, Vol. 9, No. 4, October 1991.
Gibbons, R. ., & Katz, L. . (1989). Layoffs and Lemons. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01bg257f06q (Original work published April 1989)
Working Papers