In many labor markets, e.g., for lawyers, consultants, MBA students, and professional sport players, workers get offered and sign long-term contracts even though waiting could reveal significant information about their capabilities. This phenomenon is called unraveling. We examine the link between wage bargaining and unraveling. Two firms, an incumbent and an entrant, compete to hire a worker of unknown talent. Informational frictions prevent the incumbent from always observing the entrant’s arrival, inducing unraveling in all equilibria. We analyze the extent of unraveling, surplus shares, the average talent of employed workers, and the distribution of wages within and across firms.
Do asset prices aggregate investors’ private information about the ability of financial analysts? We show that as financial analysts become reputable, the market can get trapped: Investors optimally choose to ignore their private information, and blindly follow analyst recommendations. As time goes by and recommendations accumulate, arbitrage based on the inferred ability of analysts may become profitable again. The market can thus be trapped at times and yet be able, in the long run, to sort the pundits from the quacks. However, this process is impaired when asset fundamentals are volatile: in this case, the market might be trapped indefinitely.