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Faculty of Economics

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Gottfries, A.

Bargaining with renegotiation in models with on-the-job search

CWPE1725

Abstract: This paper studies renegotiation in models with on-the-job search, with an application to minimum wages. My formulation nests earlier models in the literature as limit cases when the frequency of renegotiation goes to zero or infinity. The equilibrium wage distribution and the bargaining outcomes are unique. When there is a strong response of turnover to a wage increase, firms accept higher wages, which increases the share of the surplus captured by the worker. Turnover responds more to wages when marginally better job offers arrive more frequently, and when renegotiation occurs less frequently. A minimum wage increase leads to a higher density of jobs at the minimum wage. This can spread up the wage distribution, as the increased density provides a motive for firms to accept higher wages in order to reduce turnover. However, this effect depends crucially on the frequency of renegotiation being low.

Keywords: On-the-job search, Bargaining, Renegotiation, Wage contracts

JEL Codes: C78 J31 J41 J64

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PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1725.pdf

Open Access Link: https://doi.org/10.17863/CAM.21800