Orie Shelef, Stanford University, and Amy Nguyen-Chyung, University of Michigan
Competing for Labor through Contracts: Selection, Matching, Firm Organization and Investments
Does firm competition for workers lead the best workers to the most productive firms? In a model of of imperfect competition for workers through incentive contracts, Shelef and Nguyen-Chyung highlight that while higher-powered incentives attract better workers, higher-powered incentives can reduce incentives for firm investment in productive resources. Driven by this mechanism, firms may endogenously differentiate and sort higher-ability workers into firms with fewer productive resources. Bringing this idea to a novel matched employer-employee panel with more than 10,000 firms in residential real estate brokerage where the authors observe both worker-specific output and incentive contracts, they first decompose productivity into worker productivity and firm productivity. The researchers find, across all firms and workers, that the best workers do not work at the most productive firms despite complementarity between firm and worker types: firms that are 15% more productive have workers that are 5% less productive. However, within firms that offer the same contracts, better workers do work at more productive firms.
The researchers confirm additional predictions of the model on the equilibrium decisions of firms and of workers. Consistent with the authors' modelling assumptions, worker heterogeneity and preferences limit the effect of incentives on worker sorting. Counterfactuals show that contractual competition meaningfully reduces aggregate productivity by driving better workers to less productive firms. The researchers' work links managerial decisions on incentive contracts and firm investments with labor market competition to explain persistent productivity differences across firms.