Abstract

We use the German Job Vacancy Survey to investigate to which extent firms are able to attract more suitable applicants by posting wages compared to bargain wages. Contrary to the theoretical predictions provided by the literature we find that the offer to bargain over pay decreases the share of suitable applicants. To explain these findings we develop a directed search model with asymmetric information and incomplete contracts, which allows firms to condition their hiring decision on the workers’ signalled productivity. We show that both types of recruitment policies coexist if the signal is neither too precise nor too imprecise. In such an equilibrium wage-posting firms hire only workers with a high signal and wage-bargaining firms hire workers with a high and a medium signal.