Does Intra-Firm Bargaining Matter for Business Cycle Dynamics?
Posted: 14 Jul 2021
Date Written: 2013
We analyze the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback 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 keys to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared with a bargaining framework in which firms neglect this feedback effect. However, the effects of intra-firm bargaining on aggregate adjustment dynamics, volatility, and co-movement are negligible.
JEL Classification: E3
Suggested Citation: Suggested Citation