Discussion Problem
In a market with asymmetric information, a hiring manager is trying to hire high quality employees. The manager will pay hourly wages equal to the value of the marginal product of labor (V MP Li) for each type i. The manager will screen prospective employees based on the number of Linked-In connections they have, x, knowing that high type workers will have more connections. High types have a utility function, UH(w, x) = w - 1 2 x, with V MP LH = 10. Low types' utility function is, UL(w, x) = w - x, with V MP LL = 4. There are 50% of each type in the market, and if one doesn't work they receive a utility of zero.
(a) Find the wages and number of Linked-In connections if there is perfect information.
(b) Find the wages if the hiring manager can't observe types and cannot Linked-In information such that he breaks even on average.
(c) Design a pair of contracts, {wH, xH} and {wL, xL} where each type will reveal their type (select the contract designed for them).