A Real-Business-Cycle Model with Efficiency Wages and a Government Sector The Case of Bulgaria

Abstract

In this paper we investigate the quantitative importance of efficiency wages
of no-shirking type in explaining business cycle fluctuations in Bulgarian labor
markets. This is done by augmenting a relatively standard real business
cycle model with unobservable workers effort by employers and efficiency wage
contracts, as well as through the inclusion of a detailed government sector.
This imperfection in labor markets introduces a strong internal transmission
mechanism that allows the model framework to capture the business cycles
in Bulgarian data better than earlier models, and setups assuming perfectlycompetitive labor markets in particular.