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Abstract:
It is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyze an equilibrium model where worker productivity is private information and show that the firms' gain from worker self-selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive contracts are excessively high-powered, thereby inducing the more productive workers to exert too much effort and increasing agency costs stemming from the misallocation of effort.

Abstract:
It is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyze an equilibrium model where worker productivity is private information and show that the gains to the firms from worker self-selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive to workers to exert too much effort.

Performance pay, selection, efficiency

Abstract:
We study equilibrium wage contracts in a labour market with adverse selection and moral hazard. Firms offer incentive contracts to their employees to motivate them to exert effort. Providing incentives comes, however, at a cost, as it leads to misallocation of effort across tasks. With ex ante identical workers, the optimal wage contract is linear, and the equilibrium resource allocation optimal. With ex ante heterogenous workers, firms may increase the incentive power of the wage contract to attract the better workers. The resulting equilibrium is separating, in the sense that workers self-select on contracts. Furthermore, the contracts offered to the good workers are too high powered compared to the contracts that maximise welfare.

Performance pay, wage contracts, selection, welfare analysis

Abstract:
We analyze the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash bargaining. A key insight is that an increase in the average education level exerts a negative externality on wages through its positive externality on the firms' outside option. As a consequence, the real wage of all workers decreases in the short run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long-run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 1970s and 1980s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.

Abstract:
We analyze the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash-bargaining. The key insight is that an increase in the supply of highly educated workers improves the firms' outside option. As a consequence, the real wage of all workers decreases in the short-run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long-run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 70s and 80s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.

Wage inequality, matching, creation costs, firing costs

Abstract:
We analyze the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash-bargaining. The key insight is that an increase in the supply of highly educated workers improves the firms' outside option. As a consequence, the real wage of all workers decreases in the short-run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long-run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the U.S. experience in the 70s and 80s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.

Wage Inequality, Matching, Creation Costs, Firing Costs

Abstract:
We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investment in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.

Abstract:
We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investment in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.

Abstract:
We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investments in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.

Matching, Training, Poaching, Efficiency

Abstract:
We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investments in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.

Matching, training, poaching, efficiency

Abstract:
This paper analyzes the interaction between wage contracts with deferred compensation and worker turnover. While deferred compensation improves the workers' incentives to exert effort, it distorts turnover decisions. We show that deferred compensation is less attractive when overall turnover in the market is high. Furthermore, we may have multiple equilibria: a low-turnover equilibrium where firms use deferred compensation to motivate workers, and a high-turnover equilibrium where they do not. Our model provides an explanation for observed differences in turnover rates between countries, e.g., US and Japan and between regions, e.g., Silicon Valley and Route 128.

Deferred Compensation, Incentive Contracts, Multiple Equilibria, Turnover

Abstract:
This paper analyses Becker's (1971) theory of employer discrimination within a search and wage-bargaining setting. Discriminatory firms pay workers who are discriminated against less and apply stricter hiring criteria to these workers. The highest profits are realized by firms with a positive discrimination coefficient. Moreover, once ownership and management are separated, both highest profits and highest utility can be realized by firms with a positive discrimination coefficient. Thus, market forces, like entry or takeovers, do not ensure that wage differentials due to employer discrimination disappear.

Search, Discrimination

Abstract:
This paper examines competitive search equilibrium when workers' effort choice and "type" are private information. We derive a modified Hosios Rule determining the allocation of resources, and analyze how private information influences the responsiveness of the unemployment rate to changes in macroeconomic variables. Most importantly, private information increases the responsiveness of the unemployment rate to changes in the general (type and effort independent) productivity level. If the changes also affect the information structure, the responsiveness of the unemployment rate may be large, even if the changes in expected productivity are small.

Private information, search, unemployment, wage rigidity

Abstract:
This paper examines the competitive search equilibrium when the workers' effort choice and type are private information. We derive a modified Hosios rule determining the allocation of resources and analyze how private information influences the responsiveness of the unemployment rate to changes in macroeconomic variables. Most importantly, private information increases the responsiveness of the unemployment rate to changes in the general (type and effort independent) productivity level. If the changes also affect the information structure, the responsiveness of the unemployment rate may be large even if the changes in expected productivity are small.

incentives, contracts, unemployment, wage rigidity, labor market search

Abstract:
We ananlyze general equilibrium effects of hyperbolic discounting among unemployed workers in search equilibrium. We show that hyperbolic discounting changes the workers' trade-off between high wages and a high exit rate from unemployment, thus influencing the behavior of firms. More specifically, firms 1) increase their number of vacancies, 2) reduce the quality of the vacancies (less capital per worker), and 3) reduce the wage attached to the vacancies. We discuss welfare consequences and derive policy implications. We find that unemployment benefits together with subsidized (or monitored) job search may increase welfare. If these policy measures are not availiable, minimum wages and subsidies to high-quality jobs may be warranted.

Search equilibrium, unemployment, hyperbolic discounting, welfare

Abstract:
Why do some vacancies offer a posted wage whereas others offer a negotiable wage? The paper endogenizes the choice of wage policy in a search model with heterogeneous workers. In particular, we characterize the circumstances under which there exists an equilibrium where all firms negotiate wages. Generally, we find that a tight labor market favors bargaining over posting, as does large worker heterogeneity. In the equilibrium of our model, labor markets are tighter when workers are more productive, suggesting a reason why wages are more often negotiated for highly paid jobs.

Abstract:
This paper proposes a labor market model with job search frictions where workers have private information on match quality and effort. Firms use wage contracts to motivate workers. In addition, wages are also used to attract employees. We define and characterize competitive search equilibrium in this context, and show that it satisfies a simple modified Hosios rule. The model is used to address the "Shimer puzzle" related to the low volatility of the unemployment rate relative to the volatility of output observed in the data. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity and in particular to changes in the information structure.

Private information, incentives, search, unemployment, wage rigidity

Abstract:
We study a labour market in which firms can observe workers' output but not their effort, and in which a worker's productivity in a given firm depends on a worker-firm specific component, unobservable for the firm. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the socially efficient incentive power of the equilibrium wage contract is constrained in the absence of unemployment benefits. We then apply the model to explain the recent increase in performance-pay contracts. Within our model, this can be explained by three different factors: (i) increased importance of non-observable effort, (ii) a fall in the marginal tax rate, (iii) a reduction in the heterogeneity of workers performing the same task. The likely effect of all three factors is an increase in the equilibrium unemployment rate.

Incentives, contracts, unemployment, efficiency

Abstract:
We study a search model with employment protection legislation. We show that if the output from the match is uncertain ex ante, there may exist a discriminatory equilibrium where workers with the same productive characteristics are subject to different hiring standards. If a bad match takes place, discriminated workers will use longer time to find another job, prolonging the costly period for the firm. This makes it less profitable for the firms to hire the discriminated workers, thus sustaining discrimination. In contrast to standard models, the existence of employers with a taste for discrimination may make it more profitable to discriminate also for firms without discriminatory preferences.

Discrimination, Employment Protection, Hiring Standards

Abstract:
This paper analyzes the interaction between on-the-job search and incentive schemes that include deferred compensation. While deferred compensation improves the workers' incentives to exert effort, it distorts on-the-job search. We show that deferred compensation is less attractive when overall turnover in the market is high. In addition there exists feedback effects between the firms' choice of wage contracts and the activity in the search market which may lead to multiple equilibria: a low-turnover equilibrium where firms use deferred compensation to motivate workers, and a high-turnover equilibrium where they do not. Our model provides an explanation for observed differences in turnover rates between countries, e.g. US and Europe or Japan.

Deferred Compensation, Incentive Contracts, Multiple Equilibria, On-the-job search