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ABSTRACT

The bargaining relationship between a firm and its incumbent worker who possesses firm-specific human capital is examined. It is shown that the worker's ability to withhold his/her skills strategically increases his/her bargaining power. Multiple efficient as well as inefficient equilibria involving delays in negotiation are characterized. When the firm has outside options, the range of both efficient and inefficient equilibria shrinks; moreover, delays are shortened in inefficient equilibria. The model predicts that wages are procyclical.