Abstract
In this paper, I develop a dynamic version of the efficient bargaining model grounded on optimal control in which a firm and a union bargain over the wage in a continuous-time environment under the supervision of an infinitely lived mediator. Overturning the findings achieved by means of a companion right-to-manage framework, I demonstrate that when employment is assumed to adjust itself with some attrition in the direction of the contract curve implied by the preferences of the two bargainers, increases in the bargaining power of the firm (union) accelerate (delay) the speed of convergence towards the stationary solution. In addition, confirming the reversal of the results obtained when employment moves over time towards the firm’s labour demand, I show that the dynamic negotiation of wages tends to penalize unionized workers and favour the firm with respect to the bargaining outcomes retrieved with a similar static wage-setting model.
Highlights
In his influential paper on wage contracting, Leontief (1946) argued that a monopolistic wage setter who sells labour services to a set of buyers that can freely chooseThis is a companion paper of ‘Wage Bargaining as an Optimal Control Problem: A Dynamic Version of the Right-to-Manage Model’
In a timeless environment with the same fundamental features of the dynamic model developed in Sect. 2, the mediator will maximize the instantaneous component of the linear maximandum in (3) with respect to the wage by considering that bargained employment is pinned down by the contract curve implied by the preferences of the two bargainers
I derived a dynamic version of the efficient bargaining model grounded on the maximum principle with the aim of addressing the out-of-equilibrium dynamics of negotiated wages and employment
Summary
In his influential paper on wage contracting, Leontief (1946) argued that a monopolistic wage setter who sells labour services to a set of buyers that can freely choose This is a companion paper of ‘Wage Bargaining as an Optimal Control Problem: A Dynamic Version of the Right-to-Manage Model’. To the best of my knowledge, completing the analysis set forth by Guerrazzi (2011), the present contribution is the first attempt to frame the efficient bargaining model in an optimal control setting in which time is assumed to evolve without discontinuities as it usually happens in differential games of bargaining (cf Ambrus et al 2015; Castaner et al 2018) The results of this theoretical exploration reveal that the typical findings retrieved in a companion right-to-manage framework in which employment is assumed to adjust itself in the direction of the downward-sloping labour demand schedule of the firm are completely overturned.
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