Holdup and hiring discrimination with search friction

BI, Sheng and LI, Yuanyuan (2015): Holdup and hiring discrimination with search friction.

Abstract

A holdup problem on workers’ skill investment arises when employers can adopt discriminatory hiring norm to extract higher than socially optimal profit. In such an economy, productivity (skills) and non-productivity oriented characteristics (discrimination) both matter when determining which worker has priority. The resulting firms’ preference is an intertwined ranking order, by virtue of which the strategic interdependence in skill choices between discriminated and favored groups endogenously arises. We consider frictional markets with either posted or bargained wage. With posted wage, discrimination makes all workers worse off, firms gain. Through that payoff interdependence, we identify two effects along which one group’s underinvestment may benefit all groups. With bargained wage, the discriminated (favored) group is always worse (better) off, and firms incur cost for an intermediated range of bargaining power when they discriminate. This suggests that the holdup-discrimination problem can be mitigated when search is random and wages bargained, a result in the opposite direction of Acemoglu and Shimer (1999b).

• Item Type: MPRA Paper
• Language: English
• Keywords: Discrimination; Directed Search; Pre-matching Investment
• Subjects: J - Labor and Demographic Economics > J4 - Particular Labor Markets > J42 - Monopsony ; Segmented Labor Markets; J - Labor and Demographic Economics > J7 - Labor Discrimination > J70 - General

References

Acemoglu, Daron & Shimer, Robert (1999a): "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.

Acemoglu, Daron & Shimer, Robert (1999b): "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-49, November.

Albrecht, James & Tan, Serene & Gautier, Pieter & Vroman, Susan (2004): "Matching with multiple applications revisited," Economics Letters, Elsevier, vol. 84(3), pages 311-314, September.Shouyong Shi, "Wage Differentials, Discrimination and Efficiency," European Economic Review 50 (2006), 849-875.

Brenzel, Hanna & Gartner, Hermann & Schnabel, Claus (2014): "Wage bargaining or wage posting? Evidence from the employers' side," In: Labour Economics, Vol. 29, August, S. 41-48.

Burdett, Kenneth & Shi, Shouyong & Wright, Randall (2001): "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.

Cao, Melanie & Shi, Shouyong (2000): "Coordination, matching, and wages," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 1009-1033, November.

Clark, AE & Oswald, AJ (1996): ''Satisfaction and comparison income,'' Journal of public economics 61 (3), 359-381.

Clark, AE (1997): ''Job satisfaction and gender: why are women so happy at work?'' Labour economics 4 (4), 341-372

Delacroix, Alain & Shi, Shouyong (2013): "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.

Neal, Derek A & Johnson, William R. (1996): "The Role of Premarket Factors in Black-White Wage Differences," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 869-95, October.

Fang, Hanming & Moro, Andrea (2010): "Theories of Statistical Discrimination and Affirmative Action: A Survey," NBER Working Papers 15860, National Bureau of Economic Research, Inc.

Galenianos, Manolis & Kircher, Philipp & Virág, Gábor (2011): "Market Power And Efficiency In A Search Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 85-103, 02.

Hall, Robert E. & Krueger, Alan B. (2012): "Evidence on the Incidence of Wage Posting, Wage Bargaining, and On-the-Job Search," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 56-67, October.

Heckman, James J. (1998): ''Detecting Discrimination,'' Journal of Economic Perspectives, 12(2): 101-16.

Jacquet, Nicolas L. & Tan, Serene (2012): "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1064-1104.

O'Neil, June (1990): "The Role of Human Capital in Earnings Differences between Black and White Men," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 25-45, Fall.

Philipp, Kircher, & Manolis, Galenianos (2009): ''Directed Search with Multiple Job Applications,'' Journal of Economic Theory, 114(2), pp. 445-471.

Lang, Kevin & Michael, Manove (2003): "Wage announcements with a continuum of worker type," Annales d'Economie et de Statistique, ENSAE, issue 71-72, pages 223-244.

Lang, Kevin & William, T. Dickens (2005): ''Racial Discrimination in Labor Markets with Posted Wage Offers," American Economic Review, 95 (4), 1327-1340.

Lang, Kevin & Michael, Manove (2011): ''Education and Labor Market Discrimination," American Economic Review, 4 (101), 1467-96.

Lang, Kevin & Jee-Yeon K. Lehmann (2012): "Racial Discrimination in the Labor Market: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 50(4), pages 959-1006, December.

LI, Fei & Can, Tian (2013): ''Directed Search and Job Rotation,'' Journal of Economic Theory, Volume 148 (3), 1268–1281.

Merlino, Luca Paolo (2012): ''Discrimination, Technology and Unemployment,'' Labour Economics, 19(4), pp. 557-567

Pendakur, Krishna & Woodcock, Simon (2010): ''Glass Ceilings or Glass Doors? Wage Disparity Within and Between Firms," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 181-189.

Peters, Michael (2010): "Noncontractible Heterogeneity in Directed Search," Econometrica, Econometric Society, vol. 78(4), pages 1173-1200, 07.

Ritter, Joseph A. & Lowell, J. Taylor (2011): ''Racial Disparity in Unemployment," Review of Economics and Statistics, 93 (1), 30-42

Rosen, Asa (1997): "An equilibrium search-matching model of discrimination," European Economic Review, Elsevier, vol. 41(8), pages 1589-1613, August.

Shimer, Robert (2005): "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.

Shi, Shouyong (2001): "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.

Shi, Shouyong (2002): "Product Market and the Size-Wage Differential," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 21-54, February.

Shi, Shouyong (2002): "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," Review of Economic Studies 69, 467-491.

Tan, Serene (2012): ''Directed Search and Firm Size,'' International Economic Review, Vol. 53(1), 95-113.

Virág, Gábor (2011): "High profit equilibria in directed search models," Games and Economic Behavior, Elsevier, vol. 71(1), pages 224-234, January.