COMPETING FOR TALENT By Yuhta Ishii, Aniko Öry, and Adrien Vigier February 2018 COWLES FOUNDATION DISCUSSION PAPER NO. 2119 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 http://cowles.yale.edu/ Competing for Talent Yuhta Ishii, Aniko Ory,¨ and Adrien Vigier∗ First Draft: August 2015 This Draft: February 2018 Abstract 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. Keywords: Unraveling, Talent, Wage Bargaining, Competition, Uncertainty. JEL Codes: C7, D8, J3 ∗Ishii: ITAM, Centro de Investigaci´onEcon´omica,Mexico, email:
[email protected]; Ory:¨ Yale Uni- versity, School of Management, New Haven, CT 06511, email:
[email protected]; Vigier: BI Norwegian Business School, email:
[email protected]. We thank Nicholas Chow and Hungni Chen for excellent research assistance. We are grateful to Dirk Bergemann, Simon Board, Joyee Deb, Jeff Ely, Brett Green, Jo- hannes H¨orner,Lisa Kahn, Teddy Kim, Sebastian Kodritsch, Fei Li, Ilse Lindenlaub, Espen Moen, Guiseppe Moscarini, Pauli Murto, Peter Norman, Theodore Papageorgiou, Larry Samuelson, Utku Unver,¨ Leeat Yariv, Juuso Valimaki for helpful discussions and comments.