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Wage/tenure contracts with heterogeneous firms

Kenneth Burdett and Melvyn Coles

Journal of Economic Theory, 2010, vol. 145, issue 4, 1408-1435

Abstract: This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster "promotion" rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.

Keywords: Search; Wage; Tenure; Contracts; Turnover; Unemployment (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Wage/Tenure Contracts with Heterogeneous Firms (2007) Downloads
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