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.
|Number of pages||30|
|Journal||Japanese Economic Review|
|Publication status||Published - 2004 Mar 1|
ASJC Scopus subject areas
- Economics and Econometrics