Munich Personal RePEc Archive

Why do employers not pay less than advertised? Directed search and the Diamond paradox

Poeschel, Friedrich (2018): Why do employers not pay less than advertised? Directed search and the Diamond paradox.

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Abstract

When employers advertise wages to attract applicants, it is not clear why employers do not renege on these advertisements ex post. Existing models typically assume that employers are somehow committed to their advertisements. This paper provides an economic explanation that aligns with the empirical evidence. Workers' expectations are fixed by advertisements, and they interpret reneging as a deviation by the employer from mutually beneficial cooperation. By consequence, the worker will exert less effort during the employment relationship if the employer reneges on the advertisement. To avoid this, sufficiently patient employers choose not to renege, and commitment to advertisements arises endogenously.

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