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Federal Reserve Bank of Richmond
Economic Quarterly
Does Intra-Firm Bargaining Matter for Business Cycle Dynamics?
Michael U. Krause
Thomas A. Lubik

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.

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Michael U. Krause & Thomas A. Lubik, "Does Intra-Firm Bargaining Matter for Business Cycle Dynamics?" , Federal Reserve Bank of Richmond, Economic Quarterly, issue 3Q, pages 229-250, 2013.
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