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To match or not to match? Optimal wage policy with endogenous worker search intensity

Author

Listed:
  • Fabien Postel-Vinay

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, LEA - Laboratoire d'Economie Appliquée - INRA - Institut National de la Recherche Agronomique, Department of Economics - UCL - University College of London [London], PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR, University of Bristol [Bristol], ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, IZA - Institute for the Study of Labor - Institute for the Study of Labor, DELTA - Département et Laboratoire d'Economie Théorique et Appliquée - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique, INRA)

  • Jean-Marc Robin

    (Economics department - MIT - Massachusetts Institute of Technology, UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

We consider an equilibrium search model with on-the-job search where firms set wages. When an employee receives an outside job offer, it is optimal for the employer to try to retain the employee by matching the offer. This results in a wage increase for the worker. However, if workers are able to vary their search intensity, then this ‘offer-matching' policy runs into a moral hazard problem. Knowing that outside offers lead to wage increases, workers tend to search more intensively, which is costly for the firms. Assuming that firms can commit never to match outside offers, we examine the set of firm types for which it is preferable to do so. In particular, we show that a plausible pattern is one where a ‘dual' labor market emerges, with ‘bad' jobs at low-productivity, nonmatching firms and ‘good' jobs at high-productivity, matching firms.

Suggested Citation

  • Fabien Postel-Vinay & Jean-Marc Robin, 2004. "To match or not to match? Optimal wage policy with endogenous worker search intensity," SciencePo Working papers Main hal-03587620, HAL.
    • Handle: RePEc:hal:spmain:hal-03587620
    DOI: 10.1016/S1094-2025(03)00058-9
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    Citations

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    Cited by:

    1. Di Addario, Sabrina & Kline, Patrick & Saggio, Raffaele & Sølvsten, Mikkel, 2023. "It ain’t where you’re from, it’s where you’re at: Hiring origins, firm heterogeneity, and wages," Journal of Econometrics, Elsevier, vol. 233(2), pages 340-374.
    2. Cynthia Doniger, 2023. "Wage Dispersion with Heterogeneous Wage Contracts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 138-160, December.
    3. Xin Zhao & Yishuo Jiao & Dan Wu, 2022. "The impact of Internet use on labor wage distortions: Empirical Evidence From China," SAGE Open, , vol. 12(2), pages 21582440221, May.
    4. Rendon, Silvio, 2023. "Wage-Specific Search Intensity," IZA Discussion Papers 15971, Institute of Labor Economics (IZA).
    5. Sarah Le Duigou, 2020. "Endogenous Unemployment Benefits in an Equilibrium Job Search Model over the Life-Cycle," Post-Print hal-03884234, HAL.
    6. Etienne Lale, 2022. "Search and Multiple Jobholding," Working Papers 22-07, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    7. Chen, Yu & Doyle, Matthew & Gonzalez, Francisco M., 2024. "Wages as signals of worker mobility," Theoretical Economics, Econometric Society, vol. 19(1), January.

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