A THEORY OF WAGES AND LABOR DEMAND WITH INTRA‐FIRM BARGAINING AND MATCHING FRICTIONS*

This article provides a model of labor market equilibrium with search and within‐firm strategic bargaining. We yield explicit closed form solutions with heterogeneous labor inputs and capital. The solution exhibits overemployment. We show that higher relative bargaining power for some groups of workers may lead to overemployment relative to other groups, with such other groups being underemployed instead if they have a lower relative bargaining power. Similarly, the hold‐up problem between capitalists and employees does not necessarily lead to underinvestment in physical capital.     

GOVERNMENT‐MANDATED DISCRIMINATORY POLICIES: THEORY AND EVIDENCE*

We study an economy with private and public sectors in which workers invest in imperfectly observable skills that are important to the private sector but not to the public sector. Government regulation allows native majority workers to be employed in the public sector with positive probability while excluding the minority from it. We show that even when the public sector offers the highest wage rate, it is still possible that the discriminated group is, on average, economically more successful. The widening Chinese/Malay wage gap in Malaysia since the adoption of its New Economic Policy in 1970 supports our model.     

THE COST OF INCOME REDISTRIBUTION IN AUSTRALIA*

This paper analyses the effect of raising effective marginal tax rates on the income of the representative household in each gross income decile in Australia by one percentage point, and distributing the proceeds of the tax increase either in the form of an equal per capita grant, or as an equal payment to members of households in the lower half of the income distribution. The effectiveness of the program in redistributing income is measured as the ratio of total gains in disposable income to households in target deciles to losses in non-target groups, or as the proportional reduction in the poverty gap. The cost is measured as the ratio of the sum of the income-equivalent of changes in the welfare of non-target groups to those of target groups, or as the ratio of income-equivalent losses to gains.     

ON THE NEUTRALITY OF COALITION FORMATION IN A PURE BARGAINING PROBLEM*

We consider the sequential bargaining game à la Stahl–Binmore–Rubinstein with random proposers, juxtaposing an ex ante coalition formation stage to their bargaining game. On the basis of the expected outcomes in the negotiation over how to split a dollar, players can form coalitions in a sequential manner, within each of which they can redistribute their payoffs. It turns out that the grand coalition does form, and that each player receives his discounted expected payoff, which is obtained by playing as a single player in the negotiation, although there could be many equilibria in the bargaining stage.     

A SIGNALING THEORY OF GRADE INFLATION*

When employers cannot tell whether a school truly has many good students or just gives easy grades, a school has incentives to inflate grades to help its mediocre students, despite concerns about preserving the value of good grades for its good students. We construct a signaling model where grades are inflated in equilibrium. The inability to commit to an honest grading policy reduces the efficiency of job assignment and hurts a school. Grade inflation by one school makes it easier for another school to do likewise, thus providing a channel to make grade exaggeration contagious.     

A THEORY OF MONEY AND MARKETPLACES*

This article considers an infinitely repeated economy with divisible fiat money. The economy has many marketplaces that agents choose to visit. In each marketplace, agents are randomly matched to trade goods. There exist a variety of stationary equilibria. In some equilibrium, each good is traded at a single price, whereas in another, every good is traded at two different prices. There is a continuum of such equilibria, which differ from each other in price and welfare levels. However, it is shown that only the efficient single‐price equilibrium is evolutionarily stable.     

A HIERARCHICAL THEORY OF THE FIRM*

This paper provides a mathematically coherent and concise formulation of the Williamson market-failure approach and, hence, develops models for single-level and multilevel firms and organizations. These models optimally determine the extent of integration for each viable link on every hierarchical level, When the models are reformulated in terms of four operational parameters that determine integration, applied benefit-cost methods can be utilized, in practice, to model a firm. Both static and dynamiclmodels-are presented.     

WAGE SIGNALING: A DYNAMIC MODEL OF INTRAFIRM BARGAINING AND ASYMMETRIC LEARNING*

The article analyzes the effect of employer–worker bargaining on wage dynamics in the presence of asymmetric information between current and potential employers. A failure to reach an agreement leads to output loss. Because the disagreement points depend upon the worker's productivity, productive workers separate themselves from less productive workers and signal their ability through wages. In existing models of asymmetric learning, wages are attached to publicly observable characteristics and wage growth occurs only when there is a change in observable characteristics. This model, in contrast, generates an increase in earnings dispersion in cohorts of workers with similar observable characteristics.     

A STATISTICAL THEORY OF EQUILIBRIUM IN GAMES*

This paper describes a statistical model of equiliobrium behaviour in games, which we call Quantal Response Equilibrium (QRE). The key feature of the equilibrium is that individuals do not always play responses to the strategies of their opponents, but play better strategies with higher probability than worse strategies. we illustrate several different applications of this approach, and establish a number of theoretical properties of this equilibrium concept. We also demonstrate an equililance between this equilibrium notion and Bayesian games derived from games of complete information with perturbed payoffs     

ON THE POLITICAL ECONOMY OF IMMIGRATION AND INCOME REDISTRIBUTION*

In this article, we analyze an economy in which agents vote over immigration policy and redistributive tax policy. We show that natives' preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy. We also show that changes in the degree of international capital mobility, the distribution of initial capital among natives, the wealth or poverty of the immigrant pool, and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies. Finally, we provide some empirical support for the model's predictions.     

A THEORY OF MAN AS A CREATOR OF THE WORLD*

The present paper proposes a theory of man, wherein man constructs models of the world based on past experiences in social situations. The present theory considers experiences, or chunks of impressions, as primitives instead of an objective game, which is assumed to be given in the standard game theory. Agents construct models of the world based on direct and indirect experiences. Each model comprises a structural part and a factual part. The structural part is represented as a game, while the factual part is represented as a strategy profile of this game. In constructing a model, an agent might use certain axioms—for example coherence, according to which the model should be able to explain his or her own experiences; conformity to a solution concept; and minimality with respect to some simplicity measure. A few applications are presented to demonstrate how this theory works.     

AN EXPERIMENT WITH ULTIMATUM BARGAINING IN A CHANGING ENVIRONMENT*

We present experimental results on the ultimatum bargaining game which support an evolutionary explanation of subjects’ behaviour in the game. In these experiments subjects interacted with each other and also with virtual players, i.e. computer programs with pre‐specified strategies. Some of these virtual players were designed to play the equitable allocation, while others exhibited behaviour closer to the subgame‐perfect equilibrium, in which the proposer's share is much larger than that of the responder. We have observed significant differences in the behaviour of real subjects depending on the type of “mutants” (virtual players) that were present in their environment.     

THE BEHAVIOUR OF SOLUTIONS TO BARGAINING PROBLEMS ON THE BASIS OF SOLIDARITY*

The main purpose of this paper is to provide a systematic study of the solidarity‐type axioms for classical convex bargaining problems. As a consequence, we present alternative characterizations for some well‐known solutions in the literature. Instead of using the Monotonicity axiom, the paper provides characterizations of the egalitarian solution and the Kalai–Somorodinsky solution using slightly weaker versions of Nash's original IIA for convex bargaining problems with a fixed population.     

CORPORATE BANKRUPTCY REORGANIZATIONS: ESTIMATES FROM A BARGAINING MODEL*

This article uses a novel approach to measure the unobserved liquidation value of a firm that relies on the information contained in the allocations that are agreed upon in Chapter 11 negotiations. I estimate a game theoretic model that captures the influence of liquidation value on the equilibrium allocations using a newly collected data set. I find that the liquidation values are higher when the industry conditions are more favorable, and the real interest rates are higher. I use the estimated model to conduct a counterfactual experiment to quantitatively assess the impact of a mandatory liquidation on the equilibrium allocations.