New Explanations for the Firm Size-Wage Premium

Abstract

This paper contributes some new explanations for the firm size-wage premium. We find that if the difference between the two types¡¦ status quo utility levels is large enough, then the small firm will reject the good agent more often than the large firm. The reason behind this result is that the capital-like resource restriction interferes with the willingness of the small firm to mitigate the information rent caused by the countervailing incentive. Moreover, when the countervailing incentive exists and when both firms want to delegate the tasks to both types, the good agent produces more output in the large firm and therefore gets a higher payment. These findings support the labor quality explanation that larger firms employ higher-quality workers and the productivity hypothesis that workers are more productive in large firms and therefore ask for higher wages, but from a kind of markedly different reasoning.Firm size-wage premium Countervailing incentives Employment decisions.