Publication Date: February 2018
In many labor markets, e.g., for lawyers, consultants, MBA students, and professional sport players, workers get oﬀered and sign long-term contracts even though waiting could reveal signiﬁcant information about their capabilities. This phenomenon is called unraveling. We examine the link between wage bargaining and unraveling. Two ﬁrms, an incumbent and an entrant, compete to hire a worker of unknown talent. Informational frictions prevent the incumbent from always observing the entrant’s arrival, inducing unraveling in all equilibria. We analyze the extent of unraveling, surplus shares, the average talent of employed workers, and the distribution of wages within and across ﬁrms.
Unraveling, Talent, Wage Bargaining, Competition, Uncertainty
JEL Classification Codes: C7, D8, J3