DP3658 Incomplete Wage Posting

Author(s): Claudio Michelacci, Javier Suarez
Publication Date: November 2002
Keyword(s): adverse selection, bargaining, directed search, search frictions, wage inequality
JEL(s): J30, J41
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3658

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.