Hidden Information as a Source of Misallocation, with Bayarmaa Dalkhjav
Abstract
We develop a general equilibrium model where key employee information is hidden from employers, leading to a sub-optimal allocation of resources. The health of the employees is not verifiable by employers, and an employee with poor health is less productive than a healthy one. We use this framework to study the loss of resources due to misallocation associated with the opioid crisis. Addicts are less productive and absent more often, which by itself generates output losses. In addition, since employers cannot distinguish addicts from non-addicts, wages differ from marginal productivity, creating a sub-optimal allocation of resources. Calibrating the model to the US, we find that opioid addiction reduces output by 0.64% and the misallocation channel accounts for 18% of this.
[paper]
We develop a general equilibrium model where key employee information is hidden from employers, leading to a sub-optimal allocation of resources. The health of the employees is not verifiable by employers, and an employee with poor health is less productive than a healthy one. We use this framework to study the loss of resources due to misallocation associated with the opioid crisis. Addicts are less productive and absent more often, which by itself generates output losses. In addition, since employers cannot distinguish addicts from non-addicts, wages differ from marginal productivity, creating a sub-optimal allocation of resources. Calibrating the model to the US, we find that opioid addiction reduces output by 0.64% and the misallocation channel accounts for 18% of this.
[paper]