Hidden information as a source of misallocation: An application to the opioid crisis

Abstract

We develop a general equilibrium model where key employee information is hidden from managers, leading to a suboptimal allocation of resources. The health of the employees is not verifiable by managers, and an employee with poor health is less productive than a healthy one. We use this framework to study the loss of resources due to misallocation associated with the opioid crisis. Individuals with opioid use disorder are less productive and absent more often, which by itself generates output losses. In addition, since managers cannot distinguish unhealthy from healthy workers, wages differ from marginal productivity, creating a suboptimal allocation of resources. Calibrating the model to the U.S., we estimate that opioid misuse reduced output by $218.07 billion in 2023, with 12.4% of this loss attributable to misallocation.