The role of expectation in job search and the firm size effect on wages

Takako Fujiwara-Greve, Henrich R. Greve

Research output: Contribution to journalArticle

Abstract

We formulate dynamic games which give a rationale to the firm size-wage effect that the sheer firm size increases wages. We postulate that past wages of large firms are known to new employees, while those of small firms are not. Large firms can credibly induce workers to expect high future wages and reduce turnover, while small firms have no choice but to be myopic and pay low wages. The equilibrium wage differential obtains under the same worker characteristics and production function. We provide empirical evidence that workers' expectations depend on firm size and affect wages as predicted by our model.

Original languageEnglish
Pages (from-to)56-85
Number of pages30
JournalJapanese Economic Review
Volume55
Issue number1
DOIs
Publication statusPublished - 2004 Mar 1

ASJC Scopus subject areas

  • Economics and Econometrics

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