Francis Kiraly (Department of Economics Keele University,)
Abstract
This paper considers an equilibrium search model with on-the-job search where firms set wages.We look at optimal employment contracts when workers are heterogeneous and choose search intensity. Firms may want to retain their good workers by matching any offers that these employees may receive from other firms. However, if workers are able to vary their search intensity, this ‘‘offer-matching’’ policy leads to a moral hazard problem. Workers are induced to search more intensively, which is costly. Assuming that firms can commit to retain and employ all workers, irrespective of their ability, we establish conditions under which it is optimal to do so. The idea is that firms can create an adverse selection situation that reduces outside offers from raiding firms. We describe equilibria where all firms use these so-called ‘‘pooling’’ contracts. The intuition is that the gains from reducing the returns to search may outweigh the costs of retaining all workers, including the low ability ones. We also derive conditions under which only ‘‘separating’’ contracts are offered and firms only retain the high ability workers. Some equilibria involve contracts where an ‘‘efficiency wage’’ is paid that again deters workers from actively looking for outside offers. Finally, we show that for a range of parameter values multiple equilibria are also possible.
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Publisher Info
Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2003/04.
Length: 38 pages Date of creation: Sep 2003 Date of revision:
Jan 2004 Handle: RePEc:kee:kerpuk:2003/04
Note: Revised (January 2004) version of my (September 2003) paper entitled Layoffs and Promotions with Heterogeneous Workers and On-the-job Search. Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom Phone: +44 (0)1782 584581 Fax: +44 (0)1782 717577 Email: Web page: http://www.keele.ac.uk/depts/ec/cer/ More information through EDIRC
Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom Email: Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm
For technical questions regarding this item, or to correct its listing, contact: (Martin E. Diedrich).
Find related papers by JEL classification: J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
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