Bargaining with Renegotiation in Models with On-the-Job Search

Abstract

This paper provides a solution for how to model bargaining in models with on-the-job search. The solution is based on wages being infrequently renegotiated. With renegotiation, the equilibrium wage distribution and the bargaining outcomes are both unique, and the model nests earlier models in the literature as limit cases when the frequency of renegotiation goes to zero or to infinity. Furthermore, the rate of renegotiation affects the nature of the equilibrium. A higher rate of renegotiation lowers the response of the match duration to a wage increase, which decreases a firm's willingness to accept higher wages. This results in a lower share of the match surplus going to workers. Moreover, a high rate of renegotiation also lowers the positive wage spillovers from a minimum wage increase, since these spillovers rely on firms' incentives to use higher wages to reduce turnover.

Keywords: On-the-Job Search, Bargaining, Renegotiation, Wage Contracts, Minimum Wages, Spillovers

JEL Classification: C78, J31, J41, J64