Shining with the stars: competition, screening, and concern for coworkers' quality

We study how workers' concern for coworkers' ability (CfCA) affects competition in the labor market. Two firms offer nonlinear contracts to a unit mass of prospective workers. Firms may differ in their marginal productivity, while workers are heterogeneous in their ability (high or low) and their taste for being employed by any of the two firms. Workers receive a utility premium when employed by the firm hiring most high-ability workers and suffer a utility loss if hired by its competitor. These premiums/losses are endogenously determined. We characterize contracts and workers' sorting into the two firms under complete and private information on workers' ability. We show that CfCA is detrimental to firms, but it benefits high-ability workers, especially when their ability is observable. In addition, CfCA exacerbates the existing distortion in high-ability workers' sorting into the two firms.