Abstract
Using directed search to model the product market and the labor market, I show that large plants can pay higher wages to homogeneous workers and earn higher expected profit per worker than small plants, although plants are identical except size. A large plant charges a higher price for its product and compensates buyers with a higher service probability. To capture this size-related benefit, large plants try to become larger by recruiting at high wages. This size-wage differential survives labor market competition because a high wage is harder to get than a low wage, Moreover, the size-wage differential increases with the product demand when demand is initially low and falls when demand is already high.
Original language | English (US) |
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Pages (from-to) | 21-54 |
Number of pages | 34 |
Journal | International Economic Review |
Volume | 43 |
Issue number | 1 |
DOIs | |
State | Published - 2002 |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics