Preliminary

In this paper I explore wage-tenure contracts in a random search framework, where work-ers search on and off the job for employment opportunities similar to that of Lentz (2010) and Bagger and Lentz (2013). The worker determines the frequency by which employment oppor-tunities arrive through a costly choice of search intensity, which is unobserved by the firm and cannot be directly contracted upon. Firms differ in the marginal productivity by which they employ workers. Wages are set by sequential auction as in Postel-Vinay and Robin (2002). The analysis is closely related to Burdett and Coles (2003, 2010); Menzio and Shi (2010), and to make the problem interesting I follow their assumption of risk averse agents and imperfect capital markets. Optimal wage-tenure contracts are shown to generally be back loaded in order to discourage the worker from generating outside wage pressure on the existing match. The analysis establishes existence and uniqueness of the core mechanism. The framework is very flexible and can be extended to include both ex ante productive worker heterogeneity as well as the stochastic evolution of worker productivity. This is significant as it provides a framework for the study of wage dynamics that allows for rich heterogeneity on both firm and worker side as well as empirically useful accumulation processes in search and human capital. ∗A previous version of this paper has circulated under the title “Optimal Wage-Tenure Contracts without Searc