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Wage Bargaining, Labor Turnover, and the Business Cycle: A Model with Asymmetric Information

  • Perry, Motty
  • Solon, Gary

This paper presents a wage bargaining model in which the employer and employee are each uncertain about the other's reservation wage. Under specified circumstances, the model's equilibrium is shown to involve unilateral wage setting and inefficient labor turnover. In addition, aggregate demand shocks affect the equilibrium in a way that produces procyclical quits and countercyclical layoffs.These results are obtained without resorting to assumptions of nominal wage rigidity, long-term contracting, or aggregate price misperceptions.

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Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 3 (1985)
Issue (Month): 4 (October)
Pages: 421-33

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Handle: RePEc:ucp:jlabec:v:3:y:1985:i:4:p:421-33
Contact details of provider: Web page: http://www.journals.uchicago.edu/JOLE/

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  1. Ehrenberg, Ronald G & Danziger, Leif & San, Gee, 1983. "Cost-of-Living Adjustment Clauses in Union Contracts: A Summary of Results," Journal of Labor Economics, University of Chicago Press, vol. 1(3), pages 215-45, July.
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  3. Okun, Arthur M, 1980. "Rational-Expectations-with-Misperceptions as a Theory of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 817-25, November.
  4. Hall, Robert E & Lazear, Edward P, 1984. "The Excess Sensitivity of Layoffs and Quits to Demand," Journal of Labor Economics, University of Chicago Press, vol. 2(2), pages 233-57, April.
  5. Barro, Robert J, 1979. "Second Thoughts on Keynesian Economics," American Economic Review, American Economic Association, vol. 69(2), pages 54-59, May.
  6. Perry, Motty, 1986. "An Example of Price Formation in Bilateral Situations: A Bargaining Model with Incomplete Information," Econometrica, Econometric Society, vol. 54(2), pages 313-21, March.
  7. Hart, Oliver D, 1983. "Optimal Labour Contracts under Asymmetric Information: An Introduction," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 3-35, January.
  8. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  9. Grossman, Sanford J & Hart, Oliver D, 1981. "Implicit Contracts, Moral Hazard, and Unemployment," American Economic Review, American Economic Association, vol. 71(2), pages 301-07, May.
  10. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
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