A Game Theoretical Approach to Income Policies

Abstract

This study analyzes the use of a temporary incomes policy to combat an inflation driven by inflationary expectations. These policies typically specify wage controls which fail to provide full compensation for the expected inflation and this, in turn, gives rise to various forms of non-compliance by senior workers. These workers attempt to either preserve their purchasing power in face of controls or to force the suspension of the controls themselves. The study indicates the circumstances under which the government is forced to abandon wage controls in favor of a tight money policy designed to combat the posited inflation. The problem is treated as a dynamic Nash equilibrium game.