Unraveling and Inefficient Matching

Labor markets are said to unravel if the matches between workers and firms occur inefficiently early, based on limited information. I argue that a significant determinant of unraveling is the transparency of the secondary market, where firms can poach workers employed by other firms. I propose a model of interviewing and hiring that allows firms to hire on the secondary market as well as at the entrylevel. Unraveling arises as a strategic decision by low-tier firms to prevent poaching. While early matching reduces the probability of hiring a high type worker, it prevents rivals from learning about the worker, making poaching difficult. As a result, unraveling can occur even in labor markets without a shortage of talent. When secondary markets are very transparent, unraveling disappears. However, the resulting matching is still inefficient due to the incentives of low-tier firms to communicate that they have not hired top-quality workers. Coordinating the timing of hiring does not mitigate the inefficiencies because firms continue to act strategically to prevent poaching. *I am deeply indebted to my advisors Matthew Jackson and Alvin Roth for their constant support throughout the entirety of my PhD. I would like to thank Itai Ashlagi, Eric Budish, Gabriel Carroll, Ben Golub, Michael Harrison, Fuhito Kojima, and Paul Milgrom for valuable comments and suggestions. For helpful feedback, I would also like to thank participants of the Stanford Theory and Market Design Groups, the 2019 NASME Meeting, and the 2019 Stony Brook Game Theory conference. Finally, I am grateful for the financial support from the E.S. Shaw and B.F. Haley Fellowship for Economics.