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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: directed search; advertising; Diamond paradox
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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