The Relationship between Wages and Firm Size: An Information Theoretic Analysis

Jon Strand

International Economic Review, 1987, vol. 28, issue 1, 51-68

Abstract: The paper derives a positive relationship between the size of establishments and their average wage levels, together with a continuous wage distribution, from a model where firm sizes are endogenous. A fraction of the workers are imperfectly informed from friends about firms' wage strategies and the rest search among firms at random. The greater the share of workers that are informed, the higher is the average wage level and the smaller is the difference between firms' wage levels. Costly interfirm labor mobility is in general shown to be socially excessive. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1987
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