Status Concerns and Adverse Selection

We investigate the effects of local (resp. global) status concerns in adverse selection problem, where workers compare their wage to the wage of other workers within same firm (resp. industry). To examine the effects of status concerns, we define the status concern that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent produces less outputs than the first-best level, while the inefficient agent produces more than the second-best level of standard adverse selection output if the proportion of efficient agent is relatively large within same firm and vice versa. However, the efficient agent always produces more outputs than the first-best level, while the inefficient agent produces less than the second-best level of standard adverse selection output within same industry. Although the production spread between the utility functions under status concerns varies, the spread of the ex post information rent goes wider as the degree of status concerns increases.