ASYMMETRIC INFORMATION, BARGAINING, AND UNEMPLOYMENT FLUCTUATIONS

We construct a dynamic general equilibrium model where wages are deter mined by bilateral bargaining and the firm has superior information. T he asymmetry of information introduces unemployment fluctuations and d ynamic 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 hig h job destruction will generally be followed by a period of higher tha n average job destruction, that the presence of common shocks introduc es an informational externality, and that bargaining is an inefficient method of wage determination compared to implicit contracts.