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Little is known why the large firm wage premium (LFWP) exists. Using a matching of administrative employee-level information from Germany with firm-level data allows us to analyze how size affects the wage premium after adjusting for worker characteristics. We find that (i) firm size, not establishment size matters for the LFWP, (ii) the premium is driven by assets, not employees, (iii) the premium is a concave function of firm size, (iv) firm profitability, market share, and productivity have little impact on the premium's magnitude, (v) time-constant omitted variables explain about one-third of the premium, and (vi) reverse causality is unlikely to cause the LFWP. These findings are consistent with the idea that firms pay efficiency wages to incentivize workers but fail to support rent-sharing explanations.
