On the firms' component of wage dispersion: Endogenous effort versus search frictions

This paper presents an environment in which firms' productive heterogeneity passes through to wage dispersion via sequential search and endogenous worker effort levels. Despite small gains from trade, the model is able account for more than two thirds of the measured firm component of wage dispersion. The implied narrow range of worker utility effectively pins down the lowest wage in the distribution and higher wages simply compensate workers for their extra effort.