Intermediated Asymmetric Information, Compensation, and Career Prospects
September 13, 2021 Ron Kaniel

Follow Us


Speaker: Ron Kaniel is the Jay S. and Jeanne P. Benet Professor of Finance at the Simon School of Business, University of Rochester. He has research interests in the areas of asset pricing, financial intermediation and investments. His research is focused on understanding mutual funds investment decisions and how they impact security prices, the impact of endogenous community effects on investors’ investment decisions and equilibrium prices, and the predictive role of changes in trading volume and investors’ order flow on security returns.


Paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3532128


Recap:

On September 13, 2021, Professor Ron Kaniel from the University of Rochester joined us in a Luohan Webinar to discuss how intermediaries can help to resolve information asymmetry when dynamic incentives are involved.


Adverse selection widely exists in economic and social contexts when two parties have different information about some factors of common interests. In industries where unobserved human capital, such as talent and skill, have significant influence on outcomes, such as mutual fund managers, lawyers, and auditors, a significant subset of workers are employed by intermediaries. The intermediaries sell workers' services to clients. For example, lawyers serve clients directly but report to partners in their firm. Why don't clients contract with the workers directly? What is the role of intermediaries?


With a dynamic model including clients, workers, and intermediaries, Prof. Kaniel and his coauthor explain the role of intermediaries and the dynamics of workers' choices on work effort and independence.


While clients don't directly observe the true ability of workers' skills, the intermediary plays an important role in maintaining a credible reputation by retaining a pool of highly skilled workers. The incentives come from that 1) a better worker's higher performance prospects resulting in higher revenue in the future, and 2) retaining a large pool of higher-skilled workers decrease the outside option of workers since the belief on an independent worker's ability will be pooled with low skilled workers, therefore increase the bargaining power of intermediaries. For workers, by paying a share of the revenue to intermediaries, they can gain a good reputation more easily and quickly and would suffer an adverse selection penalty if they leave.


When the information asymmetry is very high, the intermediary wants to retain all workers. On the one hand, the cost of the worker to leave is too large. On the other hand, the threat to fire the worker can give the intermediary an advantage in bargaining and drive down the retention wages, regardless of skill. When the information asymmetry is low, the intermediary will speed up information revelation of workers' skills by firing lower-skilled workers. Then the high skilled agent would like to pay for reputation building by staying with the intermediary.


The work also provides profound implications for explaining the turnover and compensation dynamics observed in many professions. The mechanism is driven by the intermediary's desire to maintain the information advantage she has relative to clients. Prof. Kaneil also shows the main intuition works well under some extensions of the benchmark model, including pay-for-training vs. pay-for-reputation, competition for workers, and other signaling mechanisms.




If you would like to give a presentation in a future webinar, contact our Senior Economist Dr. Wen Chen (wen.chen@luohanacademy.com). For other inquiries, please contact: events@luohanacademy.com.



Subscribe to our news
SUBMIT

    Alibaba Digital Ecosystem Innovation Park, No. 1 Ai Cheng Street, Yuhang District, Hangzhou, China.


    events@luohanacademy.com


Luohan Academy    ©  2024《Luohan Academy Service Agreement》 浙ICP备2024120373号-1