DIRECTED SEARCH AND FIRM SIZE

Serene Tan ()

International Economic Review, 2012, vol. 53, issue 1, 95-113

Abstract: Standard directed search models predict that larger firms pay lower wages than smaller firms, contrary to the data. This article proposes one way to obtain this positive size–wage differential in a directed search setting. I posit that there is an optimal size associated with a firm: A firm suffers a penalty by not operating at its optimal size. I show that if this penalty is sufficiently large the size–wage differential will be obtained. My model also gives a new way to look at the data because it highlights the importance of the distinction between intended and realized firm sizes.

Date: 2012
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