Bargaining with Renegotiation in Models with On-the-Job Search

I present an on-the-job search model with bargaining and renegotiation in which turnover depends on the contracted wage. There is a unique monotone Markov equilibrium. The model encompasses elements of dynamic monopsony and rent sharing. Firms benefit from the reduced turnover associated with a higher wage and workers extract rents due to their bargaining power. Shorter wage contracts reduce the response of turnover to the contracted wage, reducing a firm’s willingness to increase pay, and thereby the worker’s equilibrium share of the match surplus. As renegotiation becomes continuous, linear surplus sharing is obtained. The model further generates spillover effects from minimum wages due to firms’ incentives to increase contracted wages to reduce turnover. These incentives, and therefore the spillovers, are weaker when wage contracts are shorter. Finally, I endogenize the frequency of renegotiation, and find that, generically, the equilibrium features infrequently renegotiated wages. (Copyright: Elsevier)