Nine years after starting work on this paper it finally published in the Journal of the Labor Economics. My gratitude goes to a fantastic editor, Kevin Lang at Boston University, and three anonymous referees whose suggestions made the paper a stronger and more robust contribution to labor market theory.

The main idea conveyed in this paper is as follows: When firms compete for heterogeneous workers in a well-defined labor market, larger firms have an incentive to lower wages more than their small competitors. If firms pay all their workers equally, the result is intuitive: it is more expensive for a large firm to raise wages than for its smaller competitors.

Strikingly, however, the result remains true even if firms post different wages for their positions. The decisive force behind this result is that when a firm hires a worker of high ability, the set of workers its other open positions compete for becomes less attractive. This externality is stronger for firms with more open positions, and therefore more market power. As such, firms that enjoy higher levels of market power may end up recruiting lower ability workers.

In this paper, I show that the resulting inefficiency, i.e., mismatch when assortative matching is desirable, may be quite substantial, and that the result is robust to sequential wage posting.