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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Status Concerns and Adverse Selection

Vol.18, No.1, March , 33–56


English Version |  Korean Version
  •   (Pusan National University)

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Abstract  

We investigate the effects of local (resp. global) status concerns in adverse selection problem, where workers compare their wage to the wage of other workers within same firm (resp. industry). To examine the effects of status concerns, we define the status concern that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent produces less outputs than the first-best level, while the inefficient agent produces more than the second-best level of standard adverse selection output if the proportion of efficient agent is relatively large within same firm and vice versa. However, the efficient agent always produces more outputs than the first-best level, while the inefficient agent produces less than the second-best level of standard adverse selection output within same industry. Although the production spread between the utility functions under status concerns varies, the spread of the ex post information rent goes wider as the degree of status concerns increases.


Keywords
   Local and Global Status Concern, Relative Wage, Adverse Selection

JEL classification codes
   C7, D2, D8, L2, M2
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