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

  • Motty Perry
  • Gary Solon

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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File URL: http://www.nber.org/papers/w1359.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1359.

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Date of creation: May 1984
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Publication status: published as Perry, Motty and Gary Solon. "Wage Bargaining, Labor Turnover, and the Business Cycle: A Model with Asymmetric Information," Journal of Labor Economics, Vol. 3, No. 4, October 1985, pp. 421-433.
Handle: RePEc:nbr:nberwo:1359
Note: LS
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  1. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  3. Robert E. Hall & Edward P. Lazear, 1982. "The Excess Sensitivity of Layoffs and Quits to Demand," NBER Working Papers 0864, National Bureau of Economic Research, Inc.
  4. 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.
  5. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  6. 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.
  7. 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.
  8. Barro, Robert J, 1979. "Second Thoughts on Keynesian Economics," American Economic Review, American Economic Association, vol. 69(2), pages 54-59, May.
  9. 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.
  10. 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.
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