IMPERFECTIONS IN LABOR-MARKETS AND THE SCOPE OF THE FIRM

Results are derived showing how the interaction of adverse selection and worker uncertainty about job preferences creates incentives for firms to offer a wider array of jobs, or integrate. The equilibrium wage structure is characterized. Non-integrated firms make retention wage offers increasing in ability while integrated firms do not. A generalization in which costs to integration are relevant is then suggested. Results indicate that it is the interaction between adverse selection and uncertain preferences that leads to a second-period allocation of workers across jobs that is not first-best, but is second-best. They also show why the presence of adverse selection and uncertain preferences create a tendency toward a scope of integration broader than the first-best outcome.