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

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 perfectly- competitive labor markets in particular.