Financial frictions and inter-firm wage dispersion: A structural estimation

Based on the stylized facts about financial frictions, this paper proposes a general equilibrium model to show that firms can transmit heterogeneous financial costs to workers through wagebargaining in the labor market with search frictions. In the equilibrium, both financial frictions and search frictions induce inter -firm wage dispersion. Structural estimation indicates that the model accounts for 34-77% of the observed wage dispersion, in which a sizable share is attributable to financial frictions. The bargaining power and market power are important for the cost -transformation process.