Cherry-picking in Labor Markets with Imperfect Information

We study a competitive labor market with imperfect information. In our basic model, the labor market consists of heterogeneous workers and ex ante identical firms who have imperfect information about workers’ productivities. Firms compete by posting wages each round to win the right to make job offers, and take turns to cherry-pick more productive workers. We also consider extensions of the model where firms differ in either productivity or information technology. The model predicts many important empirical regularities, including non-degenerated firm size distribution, persistent wage dispersions, positive sorting of firms and workers, and employer size-wage premium. The main insight of this paper is that identical workers can get different wages in a competitive market when they are pooled with coworkers of different average productivities.