The Strategic Role of Pay Secrecy in Labor Markets with Matching Frictions Tomer Blumkin * and David Lagziel † February 18, 2019 Abstract: This paper studies the strategic role of wage-secrecy arrangements, used by firms in labor contracts, to affect the dissemination of information regarding wages via professional social networks. We show that pay-secrecy policies arise in equilibrium and serve the firms to im- prove their bargaining position, in wage negotiations, by inducing search frictions that lower applicants’ salary expectations. Journal of Economic Literature classification numbers: E24, D82, J30, J31, J71. Keywords: secrecy; wage signalling; matching friction; tacit collusion. Preliminary draft – please do not circulate * Ben-Gurion University of the Negev, Beer-Sheva 8410501, Israel. e-mail: Tomerblu@bgu.ac.il; CESifo, Poschingerstrasse 5, 81679 Munich, Germany; IZA, Schaumburg-Lippe Strasse 7/9, 53113 Bonn, Germany. † Ben-Gurion University of the Negev, Beer-Sheva 8410501, Israel. e-mail: Davidlag@bgu.ac.il.