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

We study a dynamic labor market in which a risk-averse worker with career concerns chooses each period between self-employment, which generates publicly observed binary output, and employment at a firm, which pays a flat wage but keeps individual performance hidden from the outside market. The worker values future opportunities through a reputation for talent, understood as the public belief used by firms to set wages. Firms may be myopic, pricing only off public beliefs, or sophisticated, inferring from who is expected to apply. Three forces organize the results: an insurance - information trade-off, selection by talent, and inference from application decisions. A self-confirming absorbing hidden-employment region arises naturally when the value of insurance dominates the value of additional public signals, so some workers optimally stop generating public information. At any public belief there is a unique talent cutoff governing selection into self-employment, and sophisticated firms, by internalizing application-based inference, compress wages and induce different patterns of public information production than myopic firms. The framework yields testable predictions for the prevalence of self-employment, switching into opaque jobs, and wage dynamics across markets with different degrees of performance transparency.