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Noncontractible Heterogeneity in Directed Search

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  • Michael Peters

Abstract

This paper provides a directed search model designed to explain the residual part of wage variation left over after the impact of education and other observable worker characteristics have been removed. Workers have private information about their characteristics at the time they apply for jobs. Firms value these characteristics differently and can observe them once workers apply. They hire the worker they most prefer. However, the characteristics are not contractible, so firms cannot condition their wages on them. This paper shows how to extend arguments from directed search to handle this, allowing for arbitrary distributions of worker and firm types. The model is used to provide a functional relationship that ties together the wage distribution and the wage-duration function. This relationship provides a testable implication of the model. This relationship suggests a common property of wage distributions that guarantees that workers who leave unemployment at the highest wages also have the shortest unemployment duration. This is in strict contrast to the usual (and somewhat implausible) directed search story in which high wages are always accompanied by higher probability of unemployment. Copyright 2010 The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 78 (2010)
Issue (Month): 4 (07)
Pages: 1173-1200

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Handle: RePEc:ecm:emetrp:v:78:y:2010:i:4:p:1173-1200

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Cited by:
  1. Jean Guillaume Forand, 2007. "Competing Through Information Provision," 2007 Meeting Papers 661, Society for Economic Dynamics.
  2. George J. Mailath & Andrew Postlewaite & Larry Samuelson, 2010. "Pricing in Matching Markets," PIER Working Paper Archive 10-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Benjamin Lester & Ludo Visschers & Ronald Wolthoff, 2014. "Meeting Technologies and Optimal Trading Mechanisms in Competitive Search Markets," Economics Working Papers we1409, Universidad Carlos III, Departamento de Economía.
  4. Michele Battisti, 2013. "Individual Wage Growth: The Role of Industry Experience," Ifo Working Paper Series Ifo Working Paper No. 152, Ifo Institute for Economic Research at the University of Munich.

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