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Nash Bargaining, on-the-job-search and labour market equilibrium

Lookup NU author(s): Dr Roberto Bonilla Trejos


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In this paper we investigate the equilibrium consequences of assuming workers can search when employed, but only at a cost. Following the tradition of bargaining models of the labour market, when an unemployed worker contacts a firm with a vacancy, they use a Nash Bargain to establish the wage to be paid. Although search is unobservable both are aware the worker may search while employed if the wage is low enough. This on/off search decision creates a non-convexity in the Nash frontier. In order to apply Nash Bargains, we use a lottery to convexify the Nash Frontier. If an employee does contact another firm, both firms are assumed to bid for the services of the worker. As a consequence, there exists an equilibrium whhere three wages are paid in equilibrium: one to the employees that search on the job in their first employment, one to those who do not search on the job in their first employment, and one to those who have contacted a firm while employed and are no longer searching.

Publication metadata

Author(s): Bonilla R, Burdett K

Publication type: Report

Publication status: Published

Series Title: Working Paper

Year: 2006

Pages: 28

Print publication date: 23/10/2006

Source Publication Date: 23 October 2006

Institution: University of Newcastle Business School

Place Published: Newcastle upon Tyne, UK