Providing Benefits to Uninformed Workers

Tomasz Sulka
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Tomasz Sulka: HU Berlin

No 566, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: This paper develops a dynamic search model in which certain ``hidden attributes" are revealed only after acceptance of an offer and may trigger continued search in the following period. The model is applied to study how workers' imperfect information about pecuniary workplace benefits (such as employer-sponsored pension and health insurance plans) during job search, and the subsequent realization of these benefits on the job, affect the multidimensional compensation packages offered in equilibrium by profit-maximizing firms. I find that unobservability of benefits prior to acceptance distorts firms' incentives toward providing inefficiently low benefits, despite the fact that lower benefits induce higher worker turnover. Furthermore, when workers differ in strategic sophistication, and therefore hold different beliefs about unobservable benefits, there exist equilibria with spurious differentiation in compensation packages. In these equilibria, the wage differential is bounded from above by the benefit differential. The model demonstrates how imperfect information about workplace benefits can explain several empirical puzzles, including inefficiently low benefit provision and large between-firm dispersion in benefits.

Keywords: exploitative contracting; hidden attributes; job search; workplace benefits; compensating differentials (search for similar items in EconPapers)
JEL-codes: D83 D91 J31 J32 J33 (search for similar items in EconPapers)
Date: 2026-03-23
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