Wage/tenure contracts with heterogeneous firms

Ken Burdett, Melvyn Coles

Research output: Contribution to journalArticle

Abstract

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster " promotion" rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.

Original languageEnglish (US)
Pages (from-to)1408-1435
Number of pages28
JournalJournal of Economic Theory
Volume145
Issue number4
DOIs
StatePublished - Jul 2010

Keywords

  • Contracts
  • Search
  • Tenure
  • Turnover
  • Unemployment
  • Wage

ASJC Scopus subject areas

  • Economics and Econometrics

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