Verifiable wage offers and recontracting: effect on wage and consumption profiles |
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| Institution: | 1. University of California at San Diego, Economics Department, 9500 Gilman Drive #0508, La Jolla, CA 92093, USA;2. American Enterprise Institute, 1789 Massachusetts Avenue, NW, Washington, DC 20036, USA;1. School of Public Finance and Taxation, Central University of Finance and Economics, China;2. School of Economics, Renmin University of China, China;3. School of Economics and Management, Beijing Information Science and Technology University, China |
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| Abstract: | This paper analyzes the effect of recontracting and matching verifiable wage offers on the intertemporal structure of contract wage and consumption profile for a two-period economy. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to accept an alternative wage offer after a successful search. Wage offers are private to the worker but can be presented to the contract firm for matching. This paper shows that when capital markets are imperfect and wage offers are verifiable, the contract firm recontracts and matches any wage offers the worker receives up to the second-period productivity. The ex ante contract wage profile will be flat. Inefficient quits will be eliminated and there will be complete ex ante consumption smoothing. It is significant to note that the result of rising wage profile derived in numerous contract models is fragile with respect to assumptions on mechanism of interfirm labor mobility. |
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