IDEAS home Printed from
   My bibliography  Save this paper

Intra-Firm Bargaining and Wage Dynamics: A Model of Asymmetric Learning



This paper develops a bargaining model between employers and workers that is driven by asymmetric information between current employers and potential employers. Both the current employer and the worker have the same information regarding the worker's productivity. This information is not available to outside firms which observe only wages. Existing literature on asymmetric information between current and potential employers typically assumes that workers are price takers, and develops job signaling models. In equilibrium, wages are attached to publicly observable characteristics. High and low ability workers in the same job earn the same wages. This result prompts a question: Why are high productivity workers not able to capture a larger portion of the surplus than less productive workers? I develop a wage signaling model in which workers and employers bargain over wages that addresses this question, and analyze how the market learns about employed workers skills. This model generates a semi-separating equilibrium. More able workers compensate their employers by earning lower wages in the first period to elicit higher future offers from outside firms. These workers' wages depend on their actual productivity. Outside firms observe wages and infer these workers' productivity. They then make offers equal to the worker's productivity and the current employer matches the offers. Less able workers for whom it is too costly to reveal ability through wages earn a wage below their productivity in all periods. I then show that this model of bargaining can generate predictions consistent with several regularities in wage patterns of managers within firms. Existing literature which explains empirical findings on wage dynamics in internal labor markets mainly focuses on incentive models or models in which wages are determined in spot markets (JEL J3, C78,D82, D83).

Suggested Citation

  • Limor Golan, 2002. "Intra-Firm Bargaining and Wage Dynamics: A Model of Asymmetric Learning," GSIA Working Papers 2002-E27, Carnegie Mellon University, Tepper School of Business.
  • Handle: RePEc:cmu:gsiawp:-209605104

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Forges, Francoise & Peck, James, 1995. "Correlated Equilibrium and Sunspot Equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 33-50, January.
    2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    3. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
    4. Postlewaite, A & Schmeidler, David, 1978. "Approximate Efficiency of Non-Walrasian Nash Equilibria," Econometrica, Econometric Society, vol. 46(1), pages 127-135, January.
    5. Peck, James & Shell, Karl & Spear, Stephen E., 1992. "The market game: existence and structure of equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(3), pages 271-299.
    6. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    7. Balasko, Yves & Cass, David & Shell, Karl, 1980. "Existence of competitive equilibrium in a general overlapping-generations model," Journal of Economic Theory, Elsevier, vol. 23(3), pages 307-322, December.
    8. Spear, Stephen E., 1985. "Rational expectations in the overlapping generations model," Journal of Economic Theory, Elsevier, vol. 35(2), pages 251-275, August.
    9. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, vol. 63(1), pages 73-96, June.
    10. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-968, October.
    11. Woodford, Michael, 1990. "Learning to Believe in Sunspots," Econometrica, Econometric Society, vol. 58(2), pages 277-307, March.
    12. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
    13. Spear, Stephen E. & Srivastava, Sanjay & Woodford, Michael, 1990. "Indeterminacy of stationary equilibrium in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 50(2), pages 265-284, April.
    14. James Peck & Karl Shell, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1011-1029.
    15. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:-209605104. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Steve Spear). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.