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Job-to-job quits and corporate culture

  • Giuseppe Moscarini

In a frictional labor market, when an employee receives an outside offer, his employer is naturally tempted to compete to retain him. Casual observation in the labor market, however, suggests that this type of ex post competition is rare. As a consequence, employers often let valuable employees go, and job-to-job quits represent a very large fraction of total employment reallocation in the macroeconomy. We propose the following explanation. Ex post competition between firms for an employed worker raises the worker's ex ante returns to on-the-job search (OJS), if only for pure rent-seeking purposes, i.e. just to get a raise. Firms may credibly commit to ignore outside offers to their employees, let them go without a counteroffer, and suffer the loss, in order to keep in line the other employees' incentives to not search on the job. This commitment perpetuates a coordination failure among co-workers: if they all started searching on the job at a level that would be optimal should the firm indeed compete ex post against poachers, the firm would indeed be helpless and would have to compete. Therefore, a transition to a "competitive corporate culture", where firms do compete ex post and worker search intensively on the job, appears irreversible. I study a version of Burdett and Mortensen (1998)'s OJS model where workers choose the intensity of OJS covertly, thus creating a moral hazard problem, and firms have no commitment power of any kind, so they cannot "post" wage contracts. I investigate the conditions for wage posting and no matching of outside offers to be a sequential, and unique Markov, equilibrium strategy, supported by the coordination failure among co-workers. In this type of equilibrium, I find that a sufficiently steep marginal cost of OJS effort can give rise to a declining right tail in the wage distribution even if firms are identical

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 38.

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Date of creation: 2004
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Handle: RePEc:red:sed004:38
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