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Efficiency Wages under Adverse Selection and the Role of Rigid Wages

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  • Inderst, Roman

    (Sonderforschungsbereich 504)

Abstract

We consider a competitive search equilibrium where firms' publicly observable wage offers lead to the formation of independent submarkets. While in the benchmark case workers' productivities can be verified at a distance, our main analysis concerns the case of adverse selection where workers can freely enter any submarket. Under adverse selection wages for more productive workers may increase as this serves as a commitment to dismiss detected lower types, which assures incentive compatibility. The wage increase is accompanied with higher (frictional) unemployment. In a second step we question the firms' ability to commit not to renegotiate wages downwards to avoid dismissal in case they detect a less productive worker. As separation becomes more costly under renegotiation, firms employing more productive workers will choose rigid wages even if this comes at additional costs. We argue that collective bargaining with a recognized union may provide such a commitment.

Suggested Citation

  • Inderst, Roman, 1999. "Efficiency Wages under Adverse Selection and the Role of Rigid Wages," Sonderforschungsbereich 504 Publications 99-56, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:99-56
    Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged. I benefitted from suggestions by Paul Heidhues, Holger Müller, Benny Moldovanu, and seminar participants at Mannheim University, Free University of Berlin, and Humboldt University of Berlin.
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    Cited by:

    1. Jon Strand, 2002. "Effects of Progressive Taxes under Decentralized Bargaining and Heterogeneous Labor," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(2), pages 195-210, March.
    2. Strand, Jon, 2000. "Wage bargaining and turnover costs with heterogeneous labor and asymmetric information1," Labour Economics, Elsevier, vol. 7(1), pages 95-116, January.
    3. Strand, Jon, 2003. "The decline or expansion of unions: a bargaining model with heterogeneous labor," European Journal of Political Economy, Elsevier, vol. 19(2), pages 317-340, June.

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