Sunday, October 11, 2009: 11:15 AM
A fixed wage is inefficient in a standard search model when workers endogenously separate from employment. We derive an efficient employment contract that involves agents paying a hiring fee (or bond) upon the formation of a match. We estimate the fixed wage and efficient contract assuming the hiring fee is unobservable and find evidence to reject the efficient contract in favor of the fixed wage rule. A counterfactual experiment reveals the current level of labor force participation to be 13% below the efficient level, and a structural shift to the efficient contract improves welfare by 22%.