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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.

Suggested Citation

  • Michael Peters, 2010. "Noncontractible Heterogeneity in Directed Search," Econometrica, Econometric Society, vol. 78(4), pages 1173-1200, July.
  • Handle: RePEc:ecm:emetrp:v:78:y:2010:i:4:p:1173-1200
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    File URL: http://hdl.handle.net/10.3982/ECTA8379
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    Cited by:

    1. Jehiel, Philippe & Lamy, Laurent, 2015. "A mechanism design approach to the Tiebout hypothesis," CEPR Discussion Papers 10758, C.E.P.R. Discussion Papers.
    2. Larry Samuelson & Andrew Postlewaite & George Mailath, 2007. "Pricing in Matching Markets," 2007 Meeting Papers 531, Society for Economic Dynamics.
    3. Michele Battisti, 2016. "Individual Wage Growth: The Role of Industry Experience," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 55(1), pages 40-70, January.
    4. Forand, Jean Guillaume, 2013. "Competing through information provision," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 438-451.
    5. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01277548, HAL.
    6. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2015. "Meeting technologies and optimal trading mechanisms in competitive search markets," Journal of Economic Theory, Elsevier, vol. 155(C), pages 1-15.
    7. repec:hal:journl:halshs-01277548 is not listed on IDEAS
    8. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2014. "Meeting technologies and optimal trading mechanisms in competitive search markets," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-36, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Cuadras-Morató Xavier & Mateos-Planas Xavier, 2013. "Overeducation and skill-biased technical change," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-18, September.
    10. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    11. Sheng Bi & Yuanyuan Li, 2016. "Holdup and hiring discrimination with search friction," Documents de travail du Centre d'Economie de la Sorbonne 16002, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. He, Wei & Sun, Xiang & Sun, Yeneng, 2017. "Modeling infinitely many agents," Theoretical Economics, Econometric Society, vol. 12(2), May.
    13. BI, Sheng & LI, Yuanyuan, 2015. "Holdup and hiring discrimination with search friction," MPRA Paper 65100, University Library of Munich, Germany.

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