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Why do employers not pay less than advertised? Directed search and the Diamond paradox

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  • Poeschel, Friedrich

Abstract

When employers advertise wages to attract applicants, it is not clear why employers do not renege on these advertisements ex post. Existing models typically assume that employers are somehow committed to their advertisements. This paper provides an economic explanation that aligns with the empirical evidence. Workers' expectations are fixed by advertisements, and they interpret reneging as a deviation by the employer from mutually beneficial cooperation. By consequence, the worker will exert less effort during the employment relationship if the employer reneges on the advertisement. To avoid this, sufficiently patient employers choose not to renege, and commitment to advertisements arises endogenously.

Suggested Citation

  • Poeschel, Friedrich, 2018. "Why do employers not pay less than advertised? Directed search and the Diamond paradox," MPRA Paper 87920, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:87920
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    File URL: https://mpra.ub.uni-muenchen.de/87920/1/MPRA_paper_87920.pdf
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    Cited by:

    1. Sander Heinsalu, 2021. "Competitive pricing despite search costs when lower price signals quality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 317-339, February.

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    More about this item

    Keywords

    directed search; advertising; Diamond paradox;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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