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The strategic decentralization of recruiting

Yi Chen, Thomas Jungbauer and Zhe Wang

Journal of Economic Theory, 2023, vol. 209, issue C

Abstract: We propose a model of strategic delegation in professional labor markets in which big and fringe firms compete for heterogeneous workers. In this context, big firms decide whether to exercise their market power to suppress wages (wage suppression) or to delegate hiring to divisions, thereby committing to bidding more fiercely for more skilled workers (talent acquisition). This reduces the incentive for other firms to go toe-to-toe with the decentralizing firm. In equilibrium, a big firm commanding labor market power opts for either of these two strategies. We find that the presence of a big firm in the labor market is detrimental to social welfare only if its size exceeds the tipping point beyond which it ceases to decentralize. Moreover, our model is compatible with recent studies that negatively link labor market concentration and labor share. Finally, the introduction of a wage floor encourages the big firm to decentralize, increasing match quality, such that social welfare may increase despite a drop in employment.

Keywords: Strategic delegation; Market power; Recruiting; Decentralization; Labor share; Wage floor (search for similar items in EconPapers)
JEL-codes: C78 D44 J31 J42 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:209:y:2023:i:c:s0022053123000352

DOI: 10.1016/j.jet.2023.105639

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