A theory of wages and labor demand with intra-firm bargaining and matching frictions

Pierre Cahuc, Francois Marque, Etienne Wasmer

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This article provides a model of labor market equilibrium with search and within-firm strategic bargaining. We yield explicit closed form solutions with heterogeneous labor inputs and capital. The solution exhibits overemployment. We show that higher relative bargaining power for some groups of workers may lead to overemployment relative to other groups, with such other groups being underemployed instead if they have a lower relative bargaining power. Similarly, the hold-up problem between capitalists and employees does not necessarily lead to underinvestment in physical capital.

Original languageEnglish (US)
Pages (from-to)943-972
Number of pages30
JournalInternational Economic Review
Issue number3
StatePublished - Aug 1 2008


ASJC Scopus subject areas

  • Economics and Econometrics

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