Equilibrium Wage Dispersion with Worker and Employer Heterogeneity .

We consider an equilibrium search model with on-the-job search where Þrms set wages. If employers are perfectly aware of all workers job opportunities, then when an employee receives an outside job offer, it is optimal for their employer to try to retain them by matching the offer, so long as the resulting wage doesnt exceed the worker.s productivity. A Bertrand competition is thus triggered between the incumbent employer and the.poacher., which results in a wage increase for the worker. However, if workers are able to vary their search intensity, then this offer-matching policy runs into a moral hazard problem. Knowing that outside offers lead to wage increases, workers are induced to search more intensively, which is costly for the Þrms. Assuming that Þrms can commit never to match outside offers, we examine the set of Þrm types for which it is preferable to do so. We derive sufficient conditions for the equilibrium to be of the sort all Þrms match or no Þrm matches. Finally, computed examples show that, even though virtually any situation can be observed in equilibrium when the sufficient conditions are not met, a plausible pattern is one where a dual labor market emerges, with bad jobs at low-porductivity, nomatching arms and good jobs at high-poductiviy, matching arms.