Folk Theorem For Bilateral Bargaining with Vector Endowments

We analyse a bargaining game of two players on the division of the sum of their vector endowments, with alternating proposals and discounting of single period utilities. The pair of endowments is not weakly Pareto‐efficient. Until they reach an agreement, each of the parties can withdraw from bargaining and keep their endowments. Any strictly individually rational division of the sum of endowments can emerge in some subgame perfect equilibrium if discount factors are close enough to one. Each subgame perfect equilibrium, in which the parties’ decisions do not depend on past rejected proposals, leads to a weakly Pareto‐efficient agreement in the first period.     

Conjectural Variations, Market Power, and Optimal Trade Policy in a Vertically Related Industry

The paper introduces the conjectural variations and bargaining approaches into a vertical model wherein a foreign upstream firm supplies one input to two downstream firms that produce differentiated products for the export market. Various downstream firms’ competition modes and upstream's pricing schemes emerge as special cases of this formulation. The authors show that the optimal export policy of a downstream country depends crucially on the downstream firms’ conjectures of rivals’ responses, the upstream firm's pricing schemes, their relative bargaining powers, and the degree of product differentiation. If the upstream's pricing or bargaining power is strong (weak) and if the downstream's degree of competition is high (low), a tax (subsidy) is optimal owing to a strong (weak) vertical profit‐shifting effect and a weak (strong) horizontal effect.     

Does a Clean Development Mechanism Facilitate International Environmental Agreements?

When politicians negotiate in international climate conventions they may suffer from incomplete information for each other’s preferences for reaching an agreement. As is known, this may cause failure to reach an efficient cooperative agreement. We study the role of cross border abatement provisions in the likelihood of such failure. For instance, the clean development mechanism was introduced in the context of the Kyoto Protocol to allow countries to make efficiency-enhancing use of cross-country low-cost mitigation opportunities. We use a simple bargaining framework to uncover why this mechanism may reduce the likelihood of reaching an efficient cooperative climate agreement.     

WAGE BARGAINING AND MERGER INCENTIVES WITH ASYMMETRIC COSTS

This paper examines how wage bargaining within each firm influences the relationship between an equilibrium ownership structure and the most preferred ownership structure from the viewpoint of social welfare, in a unionized oligopoly of asymmetric firms with respect to productivity of capital. We consider the merger incentive of each firm’s owner when the wage level is determined through bargaining between the firm’s owner and union. We derive a condition for both the degree of cost asymmetry among existing firms and the relative bargaining power of each firm’s owner to her/his union such that each ownership structure can be observed in equilibrium. We also show that although the two types of ownership structures with the merger involving the least efficient firm can be equilibria and socially optimal, these structures are observed only when both the degree of cost asymmetry and the relative bargaining power of each firm’s owner are moderate. Finally, we analyse the relationship among the cooperative game approach employed in this paper and two non‐cooperative merger formation approaches, and examine the robustness of the results obtained in this paper against the change in the assumption regarding each firm’s cost function.     

Economies with Multiple Public Projects

This paper discusses a general equilibrium model of an economy with multiple separately provided public projects. We assume an additively separable cost structure and consider valuation equilibria with separated finance systems, one for each collective good. Under non-Euclidean representation we show the decentralization of Pareto efficient allocations by valuation equilibria and the equivalence of the core and the set of nonnegative valuation equilibria. In the case of Euclidean representation, every Pareto efficient allocation is shown to be supported as an affine valuation equilibrium that is characterized by a personalized price per unit of each public good and a personalized lump sum tax or subsidy. These results complement and clarify already established insights into Lindahl pricing and its generalizations developed in the literature.     

Multi-player bargaining with endogenous capacity

We study equilibrium prices and trade volume in a market with several identical buyers and a seller who commits to an inventory and then offers goods sequentially. Prices are determined by a strategic costly bargaining process with a random sequence of proponents. A unique subgame perfect equilibrium exists, characterized by no costly delays and heterogeneous sale prices. In equilibrium constraining capacity is a bargaining tactic the seller uses to improve a weak bargaining position. With capacity constraints, sale prices approach the outcome of an auction as bargaining costs vanish. The framework provides a building block for price formation in models of equilibrium search with multilateral matching, and offers a rationale for the adoption of single-unit auctions with fixed reservation price.     

Partially revocable commitments in a negotiation with a deadline

[Fershtman, C., Seidmann, D., 1993. Deadline effects and inefficient delay in bargaining with endogenous commitment. Journal of Economic Theory 60, 306–321] showed that the presence of an irrevocable endogenous commitment with a fixed deadline results in the so called deadline effect. In this paper we analyse the effects of partially revocable endogenous commitments of a seller in an infinite horizon negotiation in which a deadline can arise with positive probability. We obtain that when the commitment possesses a sufficiently large revocable part not only the inefficient delays disappear and an immediate agreement is reached but also the commitment has a value. On the other hand, when the commitment possesses a minimum amount of irrevocability, there exist inefficient delays in equilibrium and the commitment continues to having a value.     

THE ECONOMICS OF SECTION 301: A GAME-THEORETIC GUIDE*

Extrapolating from some simple game-theoretic models, this paper suggests that invoking Section 301 will tend to shift the terms of agreement in the US's favor. This shift will be larger (a) the greater the harm to the targeted country from having its access to the US market limited; (b) the smaller the targeted country's ability to harm the US in retaliation; (c) the smaller the costs within the targeted country of complying with the US demands; and (d) the greater the benefit to the US – in the US negotiators' perception – from the demanded liberalization. But these determinants of the success of a Section 301 action do not identify the areas where the social gains from freer trade are largest. Thus there is a tendency to direct Section 301 actions at the wrong targets. Section 301 increases bargaining frictions: attempts to exploit the bargaining power that comes from either private information or commitments can lead to costly delays to agreement or even the possibility of a complete breakdown in the negotiations. And the use of retaliatory strategies can upset an existing global equilibrium and lead to counter-retaliation.     

Strategic step-by-step negotiation

We analyze a specific type of negotiation process where parties proceed in stages taking into consideration that negotiation may end prematurely with an inefficient agreement. Parties negotiate only one increasing pie, thereby avoiding inefficiencies which are typical for issue-by-issue negotiations. For ann-stage game, we prove the existence of a unique subgame-perfect equilibrium. We then show that step-by-step negotiation can only improve players' expected payoffs if negotiation in stages reduces the difference between their equilibrium offers. For this to occur, however, the risk of negotiation must be affected by the agenda of the bargaining problem.     

Job creators,job creation,and the tax code

This paper considers the role of the tax code in determining income dispersion and vacancy creation. A “span‐of‐control” model is embedded into a search and matching environment. A cut to the tax on profits in isolation improves job creation and reduces before‐tax income inequality. The impact of a budget‐balancing increase in the wage tax depends on the bargaining power of firms. When it is high, firms pick up the lion's share of the tax burden. The tax acts like a barrier to entry: it benefits large firms at the expense of marginal ones. Net effects are an increase in unemployment and before‐tax income dispersion. Low firm bargaining power means workers pick up more of the tax burden. It acts like a subsidy to entrepreneurship reinforcing the impact of the profit tax reduction. Taxes on the returns to capital leave everyone worse off.     

International joint venture,commitment and host-country policy in an integrated market

To highlight the importance of bargaining power for both host and foreign partners, we envisage two modes, commitment and no-commitment, respectively, to examine the issue on international joint venture (IJV)’s profit-splitting and optimal host-country policy in an integrated market. With a three-stage Nash bargaining model, it turns out that in an integrated market, tax rate under commitment does not exactly equal zero unless the host partner does not benefit at all in terms of production efficiency by the IJV. Government shall subsidize joint venture while the host partner has more bargaining power than the foreign partner. Furthermore, subsidy is the optimal policy under no-commitment.     

SUBSIDIZATION AND BARGAINING IN MIXED OLIGOPOLIES

In this paper, we consider political interaction in a mixed oligopoly by characterizing how a subsidy is endogenously determined through the bargaining process between firms and politicians. We discuss how the nature of the political equilibrium changes with the type of competition, the specification of the cost function, and the timing of the game. We show that when bargaining between firms and politicians takes place, the resulting social welfare may be even worse than that under a public firm monopoly.     

NON‐RIGID WAGES AND MERGER PROFITABILITY REVERSAL UNDER CONVEX COSTS AND CENTRALIZED UNIONIZATION

Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex costs) and centralized unionization. First, it is highlighted that a wage ‘non‐rigidity’ result applies: the post‐merger wage is higher than in the pre‐merger equilibrium. Second, it is shown that a ‘reversal result’ in relation to merger profitability actually realizes when the union is sufficiently oriented towards wages. Moreover, the higher the reservation wage, the degree of product differentiation, and the union's relative bargaining power, the higher the probability that a merger reduces profits.     

Bounded rationality,expectations, and child labour

This paper develops a model with overlapping generations, where the household's optimal fertility, child labour, and education decisions depend on the parents’ expectations or beliefs about the return to education. It is shown that there exists a range of parental income where the fertility rate is high and children participate in the labour market and receive an incomplete education if a parent believes the return to education is low. The act of participating in the labour market reduces the child's ability to accumulate human capital; thus, the action of sending a child into the labour market is sufficient to ensure that the parents’ initially pessimistic expectations are fulfilled. It is then shown that a one‐time policy intervention, such as banning child labour and mandatory education, can be enough to move a country from the positive child labour equilibrium to an equilibrium with no child labour.     

Codetermination,Price Competition and the Network Industry

This research develops a tractable two‐stage non‐cooperative game with complete information describing the behaviour of price‐setting firms that must choose to be profit maximisers or bargainers under codetermination in a network industry with horizontal product differentiation. The existing theoretical literature has already shown that codetermination might arise as the endogenous market outcome in a strategic competitive quantity‐setting duopoly. In sharp contrast with this result, the present article shows that codetermination does never emerge as a Nash equilibrium in a price‐setting non‐network duopoly. Then, it aims at highlighting the role of network externalities in determining changes of paradigm of the game and letting codetermination become a sub‐game perfect Nash equilibrium when prices are strategic substitutes or strategic complements. This equilibrium may be Pareto efficient. Results allow distinguishing between mandatory codetermination and voluntary codetermination. The article also proposes a model of endogenous codetermination according to which every firm may choose to bargain with its own corresponding union bargaining unit only whether the firm's bargaining strength is exactly the profit‐maximising one. The equilibrium outcomes emerging in this case range from a uniform Nash equilibrium, in which both firms are codetermined, to mixed Nash equilibria, in which only one of them chooses to be codetermined. These results are ‘network depending’ and do not hold in a non‐network duopoly.     

Bargaining over loan contracts with signaling

This paper combines a sequential bargaining game between an enterprise and a fixed number of banks with a signaling game through which the enterprise reveals her project quality as well as her market-speed on the lending market. We characterize subgame-perfect Nash equilibrium loan contracts that are supported by separating perfect Bayesian equilibria in the signaling game. In contrast to existing models of lending markets, low-quality investment projects might be rewarded with more favorable equilibrium loan contracts than high-quality projects. Also in contrast to existing models, an increase in the competitive pressure between banks reduces the aggregate welfare in our model. The reason is that more favorable loan conditions come with a greater incentive for the ‘strong’ entrepreneur to distinguish herself from her ‘weak’ counterpart through socially wasteful signaling costs.     

A Note on the Ultimatum Paradox, Bounded Rationality, and Uncertainty

The ultimatum game is a sequential-move bargaining game in which a giver offers a taker a share of a monetary pie. The predicted subgame perfect equilibrium in the ultimatum game is for purely rational givers who act in their own narrow self-interest to offer the smallest possible share of a monetary price, and for purely rational takers to accept. Experimental trials suggest, however, that givers make generous offers because they have a taste for fairness. The analysis presented in this paper argues that it is in the best interest of givers of any type to make offers that will not be rejected, and that offers become more generous as a giver’s uncertainty about the taker’s reservation offer increases.     

Bargaining and efficiency in networks

We study an infinite horizon game in which pairs of players connected in a network are randomly matched to bargain over a unit surplus. Players who reach agreement are removed from the network without replacement. The global logic of efficient matchings and the local nature of bargaining, in combination with the irreversible exit of player pairs following agreements, create severe hurdles to the attainment of efficiency in equilibrium. For many networks all Markov perfect equilibria of the bargaining game are inefficient, even as players become patient. We investigate how incentives need to be structured in order to achieve efficiency via subgame perfect, but non-Markovian, equilibria. The analysis extends to an alternative model in which individual players are selected according to some probability distribution, and a chosen player can select a neighbor with whom to bargain.     

INFLATION,OUTPUT, AND WELFARE*

We study the effects of anticipated inflation on aggregate output and welfare within a search‐theoretic framework. We consider two pricing mechanisms: ex post bargaining and a notion of competitive pricing. Under bargaining, the equilibrium is generically inefficient and an increase in inflation reduces buyers' search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the efficient allocation, and inflation always reduces welfare, although it can have a positive effect on output for low inflation rates.