This paper considers a directed search model with risk-neutral firms and risk-averse workers. Although each firm has only one job to fill, firms can hire as many workers as they wish, and the wage a worker is paid can be contingent on the queue length at the firm and his position in the queue. We first show that, contrary to standard directed search models, the application subgame does not necessarily have a unique symmetric solution; although uniqueness is guaranteed if all firms post Flat-Wage Contracts (FWCs), i.e., contracts where firms commit to employ a fixed number of workers at a fixed wage. We then show that there is a unique equilibrium such that the expected utility of having applied to a firm is either decreasing or increasing everywhere in the number of applicants for all firms, and it is an equilibrium where all firms post FWCs such that employment is guaranteed to all workers. Compared to standard directed models where firms post one vacancy, workers are better off and firms worse off: although a firm can reduce its wage bill by insuring workers through guaranteeing employment, when all firms do so the additional number of vacancies posted increases competition among firms. In fact, in equilibrium workers are paid a perfectly competitive wage, even when the economy is finite, whereas this outcome cannot be achieved without labor hoarding contracts, even in a large economy.
Directed Search; Labor hoarding; Vacancies; Risk Sharing; Competition
JACQUET, Nicolas Laurent and TAN, Serene.
Labor Hoarding Contracts and Coordination Fictions. (2008). Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1091
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