Relational contracting and on-the-job search

In this study, I examine how firms can affect workers' job search efforts to be socially efficient with their counteroffer policies. I consider a repeated game where generations of workers take part in costly on-the-job searches. If an outside offer is realized for a worker, the employer firm can either make a counteroffer that matches the worker's outside offer or commit to not making a counteroffer based on the outside offer. I show that when firms choose to match workers' outside offers, workers spend too much effort on job search. Further, I derive an equilibrium where all firms are able to implement an efficient level of effort by not matching workers' outside offers and provide the conditions for the existence of this equilibrium.