Using private job agencies: Optimal screening or cream skimming?

Abstract

In a model with private information of the worker about her ability and unobservable effort choice, the role of public and private employment services is analyzed. The coexistence of an inefficient employment exchange and an efficient private agency may lead to optimal screening with first best contracts. This is due to the assumption that good types of workers lose more human capital than bad types in periods of unemployment or mismatch. A bad type of worker earns an information rent if the employment exchange is inefficient and the employer chooses not to use the private agency.