Testing between Competing Models of Real Business Cycles.

This paper tests a real business cycle model with efficient long-term labor contracts (the efficient long-term contract model) against a standard real business cycle model (the intertemporal substitution model). In the former model, employment and real wages are determined by bilateral dynamic bargaining between firms and workers. In the latter model, employment and real wages are determined instead by the dynamic optimization of households within the competitive market framework. The authors estimate each model using aggregate Japanese data. Their results show that the data are consistent with the efficient long-term contract model, but are inconsistent with the intertemporal substitution model. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.