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The Role of Expectation on Job Search and the Firm Size Effect on Wages

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  • Takako Fujiwara‐Greve
  • Henrich R. Greve

Abstract

We formulate dynamic games which give a rationale to the firm size–wage effect that the sheer firm size increases wages. We postulate that past wages of large firms are known to new employees, while those of small firms are not. Large firms can credibly induce workers to expect high future wages and reduce turnover, while small firms have no choice but to be myopic and pay low wages. The equilibrium wage differential obtains under the same worker characteristics and production function. We provide empirical evidence that workers’ expectations depend on firm size and affect wages as predicted by our model.

Suggested Citation

  • Takako Fujiwara‐Greve & Henrich R. Greve, 2004. "The Role of Expectation on Job Search and the Firm Size Effect on Wages," The Japanese Economic Review, Japanese Economic Association, vol. 55(1), pages 56-85, March.
    • Handle: RePEc:bla:jecrev:v:55:y:2004:i:1:p:56-85
    DOI: 10.1111/j.1468-5876.2004.t01-2-00294.x
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    Cited by:

    1. Piekkola, Hannu, 2000. "Unobserved Human Capital and Firm-Size Premium," Discussion Papers 739, The Research Institute of the Finnish Economy.

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