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Wage/tenure contracts with heterogeneous firms

Listed author(s):
  • Burdett, Ken
  • Coles, Melvyn

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster "promotion" rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(10)00024-4
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 4 (July)
Pages: 1408-1435

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:4:p:1408-1435
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, 09.
  2. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
  3. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 535-551.
  4. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, November.
  5. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, Econometric Society, vol. 70(6), pages 2295-2350, November.
  6. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, 03.
  7. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-849, November.
  8. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
  9. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
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