Holdup and hiring discrimination with search friction

Sheng Bi () and Yuanyuan Li ()
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Sheng Bi: Centre d'Economie de la Sorbonne and University of Bielefeld
Yuanyuan Li: University of Bielefeld and Centre d'Economie de la Sorbonne

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: A holdup problem on workers' skill investment can arise when employers adopt discriminatory hiring norm to extract higher than socially optimal profit. When hiring priority is determined by both productivity-dependent (skill level) and -independent characteristics (discrimination), skill investment decision becomes strategic between the discriminated and favored group. We consider frictional markets with either posted or bargained wage (fixed sharing rule). With posted wage, depending on market tightness there may be equilibrium or multiple equilibria on skill investment. With discriminatory hiring, if in equilibrium both groups stay high skilled, both are worse off and firms better off; In any equilibrium where one group underinvest, the other group remain high skilled and are better off, while firms are worse off with discrimination. With bargained wage, similar equilibrium where the favored group underinvest exists, and firms incur cost for an intermediate range of bargaining power when they discriminate

Keywords: Discrimination; Directed Search; Pre-matching Investment (search for similar items in EconPapers)
JEL-codes: J42 J7 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-02
New Economics Papers: this item is included in nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:16002

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