Self-fulfilling Early Contracting Rush

hao li, university of toronto
wing suen, university of hongkong

Abstract

In labor markets for entry-level professionals and in other related markets, job applicants' concern for availability of positions and employers' concern for availability of qualified applicants can drive some participants on the two sides to sign early job contracts. The rush to early contracting can be self-fulfilling, as both its effect on expectations about demand-supply balance in the subsequent spot market and the effect on it from changes in the demand-supply balance can be non-monotone. Matching markets with more risk-averse participants, a greater uncertainty regarding relative supply of positions, or a more polarized distribution of applicant qualities can be more vulnerable to self-fulfilling early contracting rushes. Employers can have a collective interest in preventing early offers to a few promising applicants from starting the rushes.