(joint with Yi Chen)
Abstract: We propose a model of strategic delegation in professional labor markets with heterogeneous workers. A big firm, competing with fringe firms, decides whether to exercise its market power to suppress wages. Alternatively, it may choose to delegate hiring to agents (divisions), thereby committing to bid more fiercely for workers. This reduces the incentive for fringe firms of going toe-to-toe with the big firm. In equilibrium, the big firm chooses to delegate unless (a) it is too large, (b) not productive enough, or (c) too productive. While a more productive big firm delegates more often, the optimal number of agents it delegates to decreases in the big firm's productivity. The presence of big firms does not substantially lower social welfare, unless its size exceeds the tipping point beyond which it chooses not to delegate. The introduction of a minimum wage in a professional labor market induces the big firm to delegate more aggressively, increasing match quality. Thus, social welfare may increase despite a drop in employment.
The Economic Theory Lunchtime Workshops are convened by Meg Meyer.