Intrafirm Bargaining Under Nonbinding Contracts

We present a new methodology for studying the problem of intrafirm bargaining, based on the notion that contracts cannot commit the firm and its agents to wages and employment. In particular, we analyze a general bargaining game between the firm and its employees and look for an outcome which is immune to renegotiations by any party. We demonstrate that the resulting wages and profits under a large class of complete information bargaining games distort the input and organizational decisions facing the owner of the firm’s capital. Furthermore, these distortions from the standard neoclassical paradigm have a form which is both intuitively appealing and economically significant.