Economic theory may initially have us believe that firms shouldn’t offer a higher wage than the reservation wage of workers. If they did so then another firm could enter the market, charge below the reservation wage, have lower costs, sell output at a lower price and capture the market. Yet the theory of efficiency wage provides another story, that higher productivity can offset the cost of higher wages (so that a firm offering w>w* isn’t competed out of the market), and more importantly that a firm must offer a wage greater than the reservation wage in order to operate.