Incomplete Information Bargaining and Business Cycles
AbstractThis paper presents a one-sided incomplete (asymmetric) information bargaining game in a dynamic general equilibrium framework. The model predicts business cycle movements in the economy with persistence mechanism arising from asymmetric information and search. The employment level is procyclical without the help of unusually high values of intertemporal elasticity of substitution, the real wage is procyclical but rigid. In addition, quits are procyclical and lay-offs countercyclical. Even if relevant information is revealed by the aggregate price level, the qualitative properties of the model do not change. The paper also discusses the efficiency issue. Firstly, contracts are shown to be more efficient than bargaining. Secondly, the decentralised equilibrium does not exploit the informational externalities that exist and the resulting sequence of equilibria are not only first-best inefficient but also second best inefficient.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0060.
Date of creation: Jan 1992
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Other versions of this item:
- Daron Acemoglu, 1993. "Incomplete Information Bargaining and Business Cycles," STICERD - Theoretical Economics Paper Series /1993/259, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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