Counteroffers: When Will They Occur?

In employment agreements, alternatives arise over time for either party that threaten the survival of the particular match between the worker and the firm. This paper focuses on one side of this issue, namely the optimal response by an employer to a threatened unilateral termination of an employment match by a worker. Our interest is to understand why, in a recent extensive survey of employers regarding the most recent position filled, approximately half the employers were willing to consider a counteroffer to retain the worker, while the other half would not consider such a counteroffer. A formal theory is developed that highlights the trade-off associated with a counteroffer. On the one hand, a counteroffer preserves to some extent the rents accruing to the firm from the match. On the other hand, a counteroffer policy can induce increased search by workers, thus dissipating future rents the firm would enjoy. Using a recent unique data set on employer counteroffer policy for a particular employment match, we find evidence supportive of this approach. In particular, we find that the likelihood of a counteroffer is directly related to variables that are suggestive of greater net rents to the employer from the match and inversely related to variables indicative of higher costs of a counteroffer in terms of future employee search activity