Signalling ability to pay and rent sharing dynamics

Abstract

It is often argued that competitive and rent sharing models of wage determination should be distinguished by their long-run properties. In general, rent sharing models predict the existence of a long-run relationship between wages and firm-specific ability to pay but the competitive model does not. I present a two-period counter-example which demonstrates that rent sharing can be merely a short-run phenomenon. In the separating equilibria, the firm signals ability to pay through first (but not second) period wage offers. The model also has pooling equilibria in which the firm pays rents in the long run. Show more