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Self-Enforcing Labour Contracts and the Dynamics Puzzle

Christian Calmès ()

Staff Working Papers from Bank of Canada

Abstract: To properly account for the dynamics of key macroeconomic variables, researchers incorporate various internal-propagation mechanisms in their models. In general, these mechanisms implicitly rely on the assumption of a perfect equality between the real wage and the marginal product of labour. The author proposes a theoretical validation of a micro-founded internal-propagation mechanism: he builds a model that features a limited-commitment economy, and derives endogenous self-enforcing labour contracts that produce a different linkage between the real wage and the marginal product of labour. The risk-sharing between the entrepreneur and the worker, both faced with enforcement problems, provides an admissible explanation of the prolonged comovements observed between consumption and labour. Since these co-movements are at the core of the persistence of the impulse response of output to exogenous technology shocks, this persistence can, in turn, be rationalized with the endogenous real rigidity emerging from the economy. The author shows that, in this framework, the persistence ultimately depends on the initial bargaining power and the magnitude of the risk-sharing.

Keywords: Business fluctuations and cycles; Economic models; Labour markets (search for similar items in EconPapers)
JEL-codes: E12 E49 J30 J31 J41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ent and nep-lab
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