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Holdups and Efficiency with Search Frictions
Author(s) -
Acemoglu Daron,
Shimer Robert
Publication year - 1999
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00043
Subject(s) - economics , labour economics , benchmark (surveying) , efficiency wage , wage , microeconomics , production (economics) , capital (architecture) , bargaining power , imperfect , wage bargaining , market power , product (mathematics) , linguistics , philosophy , monopoly , geometry , mathematics , geodesy , archaeology , history , geography
A natural holdup problem arises in a market with search frictions: Firms have to make a range of investments before finding their employees, and larger investments translate into higher wages. In particular, when wages are determined by ex post bargaining, the equilibrium is always inefficient: Recognizing that capital‐intensive production relations have to pay higher wages, firms reduce their investments. This can only be prevented by removing all the bargaining power from the workers, but this, in turn, depresses wages below their social product and creates excessive entry of firms. In contrast to this benchmark, we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers. This efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers. We show that the underlying reason for efficiency is not wage posting per se, but the ability of workers to direct their search toward more capital‐intensive jobs.