Hiring Process – Double Information Asymmetry

9

October

2021

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Hiring efforts can be considered futile when a freshly on-boarded employee decides to leave the company after barely a month of two of trial. However, recently companies have come to the conclusion that these mishaps might be due to a reason other than the fault of the specific individual that decided to leave the company.

Many of you probably know this already, hiring processes nowadays are extremely complex in their format. Usually composed of a multitude of stages from interviews to technical tests, the average hiring process takes about one month to be complete. The essential lesson here is that if a person decides to leave during their trial period, it is not due to a lack of motivation as they had the will to through the entirety of the hiring process in the first place.

The problem that was investigated was an instance of double information asymmetry.

On the job seeker perspective, the candidates have the advantage of knowing exactly what is sought after by the companies. By analyzing the job description, a person could precisely determine what experiences, traits of character or values that the company is looking for. Usually, by exploiting this information, the candidates will personalize and modify their profile in order to meet the employer’s wants. This is a case of Morale Hazard as the misinformation is conducted prior to the transaction, i.e. hiring that person, under the form of signaling the employer with non-representative characteristics.

On the other side, from the point of view of the employer within a company, the job description will also be an altered version of what the real job is. The Morale Hazard here is also done through signaling, by misrepresenting the core job functions in order to attract as much talent as possible. For example, stating that the job’s missions are usually 50% administrative tasks and 50% project management tasks while in reality the ratio might be closer to 80-20.


Interviews are used as screening tools to try to separate the most suited candidates from the least suited. However, these tools can prove to be less effective than expected as the interviewee can easily prepare for it in a non-truthful way.

Here we mention ‘non-truthful’ or mention how sneaky it might be to exaggerate about your profile, but the candidates cannot be blamed. The double information asymmetry happens because there is also an asymmetry of goals.

On one side, the goal of the job seekers is to get the job. It is not to ‘enhance the company’s growth’ or ‘help them in their mission’ as commonly stated during interviews, but often it is simply to get hired. And on the other side, of course the company’s goal is to find the best person for the job at a reasonable salary.

An interesting solution to put an end to this information asymmetry would be to use platforms that accept only one resume per candidate (instead of one per job application) and where details about the job description are revealed later, such as during the first interview.

What are your thoughts and ideas to tackle this information asymmetry?

Resources:
LinkedIn post that inspired me (in French):
https://www.linkedin.com/feed/update/urn:li:activity:6851817268762968064/

Article for further discussion:
https://www.business2community.com/human-resources/how-to-crush-hiring-by-recognizing-information-asymmetry-02251645

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Information Asymmetry in the Second-hand Car Market

4

October

2021

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Something you might find at a second-hand car dealership

Information asymmetry is an important topic in any market. It presents itself in situations where the selling party knows something important about the product, which the buyer does not know. In the case of second-hand car dealerships, this phenomenon, known as the principal-agent problem, arises when dealers offer cars of lower quality (lemons) at similar prices to cars of higher quality (peaches) (Kim, 1985). This makes it much harder for buyers to distinguish between good and bad quality cars. In practice, this pricing method allows dealers to sell low quality cars to naïve buyers for the same price as higher quality cars. Dealers benefit from these transactions, as they sells cars for higher prices than their true value.

However, buyers suffer from the consequences of their buy. They regarded the car as functional and believed it fit their requirements at the point of sale. Unfortunately for the buyer, the car they bought will likely have problems which went unnoticed at sale but become apparent after some driving time. When buyers in the market find out that some cars are lemons, but they cannot distinguish them from peaches, they will stop buying cars until they can distinguish between them. Nevertheless, instead of distinguishing between lemons and peaches through prices, it is more beneficial for the dealers if they do not distinguish (if they do distinguish, selling lemons becomes really hard). Since nobody wants to buy the dealers’ cars anymore dealers keep lowering the prices, still not distinguishing between lemons and peaches. Eventually, the prices become so low that the dealers cannot come around from the revenue from car sales and the market will collapse.

This market for lemons has to be controlled in some way to prevent dealers to be able to benefit from selling low quality cars at too high prices and causing the market to collapse. One way to solve the problem is to implement a market-wide, government-ordered warranty for each sold car. This will force dealers to distinguish between lemons and peaches, because they would have to pay for the repair costs of the bad quality cars they sold, if they were to break, so they give lemons either a shorter warranty, or a lower repair limit. This solution has two possible, likely positive consequences for buyers in the market. Either dealers will distinguish between lemons and peaches, allowing buyers to choose a car that fits their requirements fairly and more easily. Or dealers will stop selling lemons and only sell peaches which means buyers will only be offered good quality cars. Either way the market survives and does not collapse on itself.

Kim, J.-C. (1985). The Market for “Lemons” Reconsidered: A Model of the Used Car Market with Asymmetric Information. The American Economic Review, 75(4), 836–843. http://www.jstor.org/stable/1821360

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Information asymmetry in politics

6

October

2016

No ratings yet. The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena that mainstream economics couldn’t explain. In simple terms, information asymmetry  means that two parties to an economic transaction have different information about the goods or services being exchanged. This creates an imbalance of power. Problems related to information asymmetry are adverse selection and moral hazard. Adverse selection refers to a process in which undesired results occur when one party has more or better information. And moral hazard is a situation where one party has information advantage, they may have the incentives to use that advantage to exploit the other party.

Asymmetric information starts the downward economic spiral. A lack of equal information causes economic imbalances that result in adverse selection and moral hazards. All of these economic weaknesses have the potential to lead to market failure. A market failure is any scenario where an individual or firm’s pursuit of pure self-interest leads to incefficient results.

Information asymmetry is not only present between buyers and sellers of a product, but also at the car garage, the dentists, with a health insurance or in politics. The political candidates running for election are the ones with the better and more information and representative voters are taking the risks.

When elections are called, politicians and their supporters attempt to influence policy by competing directly for the votes of constituents in what are called campaigns. The message of the campaign contains the ideas that the candidate wants to share with the voters. With these messages the candidates try to convince the voters that they are the best and most suitable candidate. The voters would likely want to support politicians who are competent, serve public interest as well as follow the law and social norms. But among the candidates there may be some who are less suitable, even ill-intentioned. The voters can never be perfectly informed about the real abilities and intentions of the political candidates. There will always be some degree of uncertainty with reference to the characteristics of the political candidates. This is information asymmetry.

While exercising power, politicians are increasingly exposed to temptation. One of the greatest temptations is for politicians to use their position in service of their own ambitions instead of the promises they made during the campaign and to use their status and influence to their own personal advantage, or to serve the interests of friends, family, or business partners, while gradually forgetting about public interests.

Possible solutions for adverse selection and moral hazard in economic transactions are inspections, warranties, modify incentives and making the asymmetry smaller by looking information up. But what about politics? The other candidates and the media already try to inform the voters, which is also not always truthfully. Is there a way to reduce the asymmetry? Or should we just trust that the candidates serve the public’s interest?

 

Sources:
https://en.wikipedia.org/wiki/Information_asymmetry
http://www.investopedia.com/terms/a/asymmetricinformation.asp
http://thismatter.com/money/banking/information-asymmetry.htm

Click to access szanto_toth_2012_inf_asymmetry_corruption_121017.pdf

http://www.investopedia.com/ask/answers/052115/do-any-markets-not-exhibit-asymmetric-information.asp
https://en.wikipedia.org/wiki/Political_campaign

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