Accessible text version of a thirteen-slide presentation. Each heading below is one slide, in order.
LER 565, Week 5: Information Asymmetries in HR. Strand: HRM and Strategy. Instructor: Ryan Lamare.
Recall Week 4: many HR problems have several workable equilibria, and the task is coordinating on one. This week we drop a key assumption — that both sides hold complete information. One side almost always knows more: workers know their own effort and risk, while firms know the job and the conditions. Three devices shape the game — signaling, signal jamming, and screening. We will trace them through hiring, talent management, benefits, and pay.
We keep the rationality assumption but now drop complete information — and talk is cheap when interests diverge. The greater the conflict between two sides, the less any message between them can be trusted. The Archbishop test: a self-interested claim carries little information, while a costly admission carries a lot. So the real question becomes: how do we read actions, not words, to uncover what is hidden? Related media: Seinfeld, the rental-car desk — three nested asymmetries in one scene.
Either you know something the other side does not, or you want to draw out what they know. Signaling is favorable leakage: take an action a good type will take but a bad type will not. Signal jamming blocks unfavorable leakage by mimicking the action of the better type. Screening designs a choice so that each type sorts itself by which option it picks. Related media: Freakonomics, "What Do King Solomon and David Lee Roth Have in Common?"
Lemons are worth one thousand dollars to owners and fifteen hundred to buyers; peaches are worth three thousand to owners and four thousand to buyers. A buyer who cannot tell them apart offers a single blind price. At a blind price of two thousand seven hundred fifty dollars, the peaches — whose owners value them at three thousand — exit the market, so only lemons trade and the market unravels. Related media: The Big Short — bonds stuffed with lemons, sold and rated as peaches.
People know their own risk better than any insurer, and they select in or out on it. Adverse selection: price for the average and the good risks leave, so the pool keeps worsening. It is the same engine as the lemons market — pricing at the average drives out the good side. American Airlines' AAirpass shows the death spiral: it was sold for top staff but bought by the heaviest flyers.
Buyers pay more for a used car with a warranty — and not only for the repair cover. The warranty is a credible signal: only a seller who knows the car is good can afford to offer it. A signal works only if it is too costly for the wrong type to fake — the cost-difference property. HR's warranties include probation, back-loaded and performance pay, and equity that vests over years. Each lets a good employer, or a confident worker, put real money behind cheap words.
Firms want talent they cannot observe, so they demand evidence that is credible and hard to mimic — expensive education. The MBA only screens if the talented can earn it more easily, or more surely, than the untalented. If the untalented expect to fail half the time, the degree is not worth the gamble, so they do not try. The catch: the cost of screening out the untalented ultimately falls on the firm — a negative externality. Related media: Regina Hartley, TED, "Why the Best Hire Might Not Have the Perfect Resume."
A signal only separates types while it stays costly; make it cheap to fake and it stops meaning anything. Generative AI made the polished resume and tailored cover letter nearly free to produce. Employers can no longer tell high-effort applicants from automated ones — the signal drowns in noise. So they retreat to referrals and trusted networks, and well-qualified outsiders get screened out. It is a modern lemons market: graduate unemployment has topped the national average, and the cost lands on those without connections.
Same hidden information — but here the good risks are the ones who opt in. Positive, or advantageous, selection: self-selection makes the pool better, not worse. In HR, benefit menus screen workers — the plan a worker picks reveals their type.
The dog that did not bark: a signal you could have sent but did not is itself a signal. Pass/fail unravels — once the strongest take the letter grade, choosing pass/fail marks you as weaker. Everything sends a signal, including silence: "I don't vote," or a blank line on a resume. Countersignaling: the most able sometimes refuse to signal at all — the old rich do not flaunt it. "Ryan" or "Dr. Lamare"? The truly secure can drop the credential precisely because they do not need it.
If every type takes the same action, that action tells you nothing — a pooling equilibrium. A clean used car signals little if every seller cleans it; a polished resume signals little if all are polished. A separating equilibrium needs a move only the good type will make — an inspection or a warranty. When the cost gap is small, only some weak types mimic — a messy, semi-separating in-between. HR lesson: when a credential everyone can get stops separating, you need a costlier test.
Complete information is the exception in HR — one side almost always knows more than the other. Three devices answer it: signal to reveal, jam to conceal, screen to force the truth out. A credible signal must cost the wrong type more than it is worth — that is what separates the pool. Watch the equilibrium: pooling collapses a market, separating restores it. Next week: strategic moves, commitment, and credibility games.