Working Paper: CEPR ID: DP3658
Authors: Claudio Michelacci; Javier Suárez
Abstract: We consider a competitive search model where firms with vacancies choose between posting a wage ex-ante and bargaining it with workers ex-post. Workers apply for vacancies after observing firms' wage setting decisions, and differ in some observable but not verifiable qualifications that affect their productivity in the job. Thus posted wages prevent the hold-up problem associated with bargaining but are incomplete since they cannot be contingent on worker qualifications. In contrast, bargained wages increase with qualifications and, thus, may serve to entice better workers into the vacancy. We find that when the hold-up problem is mild and workers' heterogeneity is large, firms opt for bargaining. Yet equilibria with bargaining always fail to maximize aggregate net income and sometimes fail to be constrained Pareto optimal.
Keywords: Adverse Selection; Bargaining; Directed Search; Search Frictions; Wage Inequality
JEL Codes: J30; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firms' decisions to post wages or engage in bargaining (J52) | the degree of worker heterogeneity (J29) |
| Firms' decisions to post wages or engage in bargaining (J52) | severity of the holdup problem (D86) |
| Severity of the holdup problem is mild and worker heterogeneity is high (J29) | Firms opt for bargaining (J52) |
| Bargained wages increase with worker qualifications (J31) | firms' ability to attract better applicants (M51) |
| Posted wages do not reflect worker productivity (J31) | adverse selection problem (D82) |
| Adverse selection problem (D82) | inefficiencies (D61) |
| Equilibria with bargaining fail to maximize aggregate net income (C79) | wage-setting mechanisms and economic outcomes (J38) |