Self-Employment as a Signal: Career Concerns with Hidden Firm Performance

2025-09-01

AI Summary

This paper examines workers’ dynamic occupational choices between entrepreneurship (observable output) and wage employment (unobservable performance) under career reputation concerns. We develop a dynamic game-theoretic model incorporating risk aversion, binary output realization, and career-incentive structures, distinguishing myopic from equilibrium employers and endogenizing job applications as an information-transmission device. We find that high-reputation workers self-select into entrepreneurship to preserve the signaling value of external achievements, whereas low-reputation workers prefer employment for insurance and to halt further information revelation. Crucially, even absent transparent firm performance, application decisions themselves serve as strategic signals—shaping hiring thresholds and wage offers. The analysis uncovers the interplay among three mechanisms: insurance–information trade-offs, reputation-based occupational sorting, and Bayesian belief updating. We derive testable predictions on self-employment rates, cyclical occupational mobility, and wage dynamics, offering theoretical foundations for designing performance transparency protocols and public employment record systems.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Applications

Application Category

• Economics, Online Markets and Human Computation: Trust and reliance of crowd workers and data experts on GenAI
• Security and Privacy: Data transparency and provenance
• User Modeling, Personalization and Recommendation: Accountability, Transparency, and Ethics for personalization

Abstract

We analyze a dynamic labor market in which a worker with career concerns chooses each period between (i) self-employment that makes output publicly observable and (ii) employment at a firm that pays a flat wage but keeps individual performance hidden from outside observers. Output is binary and the worker is risk averse. The worker values future opportunities through a reputation for talent; firms may be benchmark (myopic) (ignoring the informational content of an application) or equilibrium (updating beliefs from the very act of applying). Three forces shape equilibrium: an insurance - information trade-off, selection by reputation, and inference from application decisions. We show that (i) an absorbing employment region exists in which low-reputation workers strictly prefer the firm's insurance and optimally cease producing public information; (ii) sufficiently strong reputation triggers self-employment in order to generate public signals and preserve future outside options; and (iii) with equilibrium firms, application choices act as signals that shift hiring thresholds and wages even when in-firm performance remains opaque. Comparative statics deliver sharp, testable predictions for the prevalence of self-employment, the cyclicality of switching, and wage dynamics across markets with different degrees of performance transparency. The framework links classic career-concerns models to contemporary environments in which some tasks generate portable, public histories while firm tasks remain unobserved by the outside market (e.g., open-source contributions, freelancing platforms, or sales roles with standardized public metrics). Our results rationalize recent empirical findings on the value of public performance records and illuminate when opacity inside firms dampens or amplifies reputational incentives.

Problem

• Analyzes worker choice between self-employment and firm employment under career concerns
• Examines how hidden performance affects reputation building and insurance trade-offs
• Investigates signaling through application decisions and public output observability

Innovation

• Dynamic labor market model with career concerns
• Self-employment enables public output observability
• Application choices signal talent to firms