Commitment and Wage Bargaining in Job Matching Models with Costly Search

Abstract

This paper provides a new strategic underpinning of the axiomatic Nash bargaining solution that is widely applied in search-matching models of the labor market. This 'intertemporal surplus sharing' (ISS) solution is usually defended as the unique subgame perfect equilibrium of a strategic bargaining model in which the risk of breakdown grows infinitely large. We argue that such extreme assumptions on the risk of breakdown during disagreement are unattractive in the context of a search-matching model. We then show that ISS arises for arbitrary breakdown rates if agents can precommit to search during disagreement.

JEL Classification: C78, E24, J41, J64