We consider the impact of job rotation in a directed search model in which firm sizes are endogenously determined and match quality is initially unknown. A large firm benefits from the opportunity of rotating workers so as to partially overcome loss of mismatch. As a result, in the unique symmetric equilibrium, large firms have higher labor productivity and lower separation rates. In contrast to the standard directed search model with multi-vacancy firms, this model can generate a positive correlation between firm size and wage without introducing any ex ante productivity differences or imposing any non-concave production function assumption.

Directed Search and Job Rotation

A holdup problem on workers' skill investment can arise when employers adopt discriminatory hiring norm to extract higher than socially optimal profit. When hiring priority is determined by both productivity-dependent (skill level) and -independent characteristics (discrimination), skill investment decision becomes strategic between the discriminated and favored group. We consider frictional markets with either posted or bargained wage (fixed sharing rule). With posted wage, depending on market tightness there may be equilibrium or multiple equilibria on skill investment. With discriminatory hiring, if in equilibrium both groups stay high skilled, both are worse off and firms better off; In any equilibrium where one group underinvest, the other group remain high skilled and are better off, while firms are worse off with discrimination. With bargained wage, similar equilibrium where the favored group underinvest exists, and firms incur cost for an intermediate range of bargaining power when they discriminate.

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Yuanyuan Li

Papers

Holdup and hiring discrimination with search friction