Efficient Firm Dynamics in a Frictional Labor Market

The introduction of firm size into labor search models raises the question how wages are setwhen average and marginal product differ. We develop and analyze an alternative to theexisting bargaining framework: Firms compete for labor by publicly posting long- termcontracts. In such a competitive search setting, firms achieve faster growth not only byposting more vacancies, but also by offering higher lifetime wages that attract more workerswhich allows to fill vacancies with higher probability, consistent with empirical regularities.The model also captures several other observations about firm size, job flows, and pay. Incontrast to bargaining models, efficiency obtains on all margins of job creation anddestruction, both with idiosyncratic and aggregate shocks. The planner solution allows atractable characterization which is useful for computational applications...