Asymmetric information about workers' productivity as a cause for inefficient long working hours

In this paper, a model of labor contracting with asymmetric information is developed in order to explain the existence of inefficient long working hours. Since firms cannot observe workers' true productivity, they use long working hours as a mechanism to sort productive workers. The model therefore predicts that workers with a high productivity will tend to work inefficient long hours. An empirical analysis confirms this prediction: high-productivity workers are more likely to experience hours constraints in the form of overemployment than low-productivity workers. Moreover, the extent of overemployment is positively related to productivity. (C) 2003 Published by Elsevier Science B.V.