Job-to-Job Quits and Corporate Culture: New Results

This paper presents an analysis of moral hazard in On-the-Job Search (OJS) in an equilibrium setting. In a frictional labor market, when an employee receives an outside offer, her employer is naturally tempted to compete against it to save the cost of hiring a replacement. Casual observation in the labor market, however, suggests that this type of ex post competition is rare, presumably because it would raise the worker's ex ante returns to 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 cannot commit in any way not to compete against outside offers. I investigate the conditions for wage posting and no matching of outside offers to be a sequential equilibrium strategy, supported by the coordination failure among co-workers. I find that the incentives to deviate from this equilibrium are strongest for low-productivity, low-wage firms-which are small, thus have few employees to discipline-and for their employees-who have the most to gain from active OJS.