Imperfections in labor markets and the scope of the firm

Abstract

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.