5. Problems arising from Ignorance When hiring.

Companies use signaling and screening to try to eliminate information asymmetries in hiring. Where prospective employees and firms share common interests—such as assigning the right worker to the right task—everyone benefits from eliminating the information asymmetry by having informed job candidates honestly tell the firms—through cheap talk—

about their abilities. When the two parties do not share common interests, cheap talk does not work.

Potential employees may inform employers about their abilities by using an expensive signal such as a college degree. An unproductive signal (as when education serves only as a signal and provides no training)

may be privately beneficial but socially harmful.

A productive signal (as when education provides training or leads to greater output due to more appropriate job assignments) may be privately and socially beneficial. Firms may also screen. Job interviews, objective tests, and other screening devices that lead to a better matching of workers and jobs may be socially beneficial. However, screening by statistical discrimination harms the discriminated-against groups. Employers who discriminate based on a particular group characteristic may never learn that their discrimination is based on false beliefs because they never test these beliefs.

678 CHAPtER 18 Information insurance? What is the price of the insurance?

Discuss the adverse selection problem. M 2. Responses to adverse Selection