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A new model of equilibrium involuntary unemployment

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  • Leo Kaas
  • Paul Madden

Abstract

We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect Nash equilibria involving unemployment and positive profits. A firm does not undercut the equilibrium wage since then high wage firms would attract its workers, thus forcing the undercutting firm out of both markets. Full employment equilibria are payoff dominated by unemployment equilibria, and the arguments are robust to decreasing returns. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Leo Kaas & Paul Madden, 2004. "A new model of equilibrium involuntary unemployment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(3), pages 507-527, March.
    • Handle: RePEc:spr:joecth:v:23:y:2004:i:3:p:507-527
    DOI: 10.1007/s00199-003-0391-2
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    Citations

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    Cited by:

    1. Kaas, Leo & Madden, Paul, 2005. "Imperfectly competitive cycles with Keynesian and Walrasian features," European Economic Review, Elsevier, vol. 49(4), pages 861-886, May.
    2. Roberto Burguet & József Sákovics, 2017. "Competitive foreclosure," RAND Journal of Economics, RAND Corporation, vol. 48(4), pages 906-926, December.
    3. Clark, Ken & Kaas, Leo & Madden, Paul, 2006. "Minimum wage increases can lead to wage reductions by imperfectly competitive firms," Economics Letters, Elsevier, vol. 91(2), pages 287-292, May.
    4. Roberto Burguet & Jozsef Sakovics, 2016. "Bidding for input in oligopoly," Edinburgh School of Economics Discussion Paper Series 266, Edinburgh School of Economics, University of Edinburgh.

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