WAGE NEGOTIATIONS UNDER 2-SIDED INCOMPLETE INFORMATION WITH THE POSSIBILITY OF SIDE CONTRACTS

Two-sided uncertainty between parties in wage negotiations can lead to job matching inefficiencies. This paper examines such inefficiencies in a case where an applicant is uninformed of his productivity with the firm, and the employer is uninformed of the applicant's reservation wage. A second case is examined where the applicant can purchase the knowledge of his productivity from a third party. Results are that the latter outcome is always more efficient, and preferred even by most types of employer. The remaining types of employer find it too costly to prevent the transfer of information, and it persists in equilibrium.