Asymmetric Information, Bargaining, and Unemployment Fluctuations

The author constructs a dynamic general equilibrium model where wages are determined by bilateral bargaining and the firm has superior information. The asymmetry of information introduces unemployment fluctuations and dynamic wage sluggishness. Because the information of the firm only is revealed gradually, wages fall slowly in response to a negative shock and unemployment exhibits additional persistence. It is shown that high job destruction will generally be followed by a period of higher than average job destruction, that the presence of common shocks introduces an informational externality, and that bargaining is an inefficient method of wage determination compared to implicit contracts.