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

Listed author(s):
  • Giuseppe Moscarini

    (Yale University)

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.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 153.

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Date of creation: 2008
Handle: RePEc:red:sed008:153
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  1. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 989-1016, November.
  2. Michael Waldman, 1984. "Job Assignments, Signalling, and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 255-267, Summer.
  3. Charles Brown & Charles Brown, 1996. "Employer Characteristics and Work Environment," Annals of Economics and Statistics, GENES, issue 41-42, pages 275-298.
  4. Fabien Postel-Vinay & Jean-Marc Robin, 2004. "To Match or Not to Match? Optimal Wage Policy With Endogenous Worker Search Intensity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 297-330, April.
  5. repec:adr:anecst:y:1996:i:41-42:p:12 is not listed on IDEAS
  6. repec:adr:anecst:y:1996:i:41-42 is not listed on IDEAS
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