Does Intra-Firm Bargaining Matter for Business Cycle Dynamics?
44 Pages Posted: 8 Jun 2016
Date Written: 2007
We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers' bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible.
Keywords: Strategic wage setting, search and matching frictions, business cycle propagation
JEL Classification: E32, J64, E24
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