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Stability and Dynamics in an Overlapping Generations Economy under Flexible Wage Negotiation and Capital Accumulation

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  • Erkki Koskela
  • Mikko Puhakka
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    Abstract

    We analyze the stability and dynamics of an overlapping generations model under imperfectly competitive labour markets without population growth and with perfect foresight. Under right-to-manage wage bargaining we assume that wage is negotiated after the decision on the capital stock. With Cobb-Douglas utility and production functions the steady state is unique and the steady state capital stock depends on the trade union’s bargaining power. This is because higher bargaining power of the trade union will induce workers to save more thus boosting the capital stock, ceteris paribus. Finally, we show that the steady state equilibrium is a saddle point.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1840.

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    Date of creation: 2006
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    Handle: RePEc:ces:ceswps:_1840

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    Keywords: overlapping generations economy; capital accumulation; flexible wage negotiation; stability and dynamics;

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    1. Simon Anderson & Michael Devereux, 1985. "Trade Unions and the Choice of Capital Stock," Working Papers, Queen's University, Department of Economics 600, Queen's University, Department of Economics.
    2. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
    3. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521001151.
    4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
    5. Michael B. Devereux & Ben Lockwood, 1989. "Trade Unions, Non-Binding Wage Agreements, and Capital Accumulation," Working Papers, Queen's University, Department of Economics 743, Queen's University, Department of Economics.
    6. Anderson, Simon P & Devereux, Michael B, 1991. "The Trade-off between Precommitment and Flexibility in Trade Union Wage Setting," Oxford Economic Papers, Oxford University Press, vol. 43(4), pages 549-69, October.
    7. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
    8. Martin Hellwig, 2004. "The Relation between Real Wage Rates and Employment: An Intertemporal General- Equilibrium Analysis," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 5(3), pages 263-295, 08.
    9. Skaksen, Mette Yde & Sorensen, Jan Rose, 2001. "Should trade unions appreciate foreign direct investment," Journal of International Economics, Elsevier, Elsevier, vol. 55(2), pages 379-390, December.
    10. Graziella Bertocchi, 2003. "Labor Market Institutions, International Capital Mobility, and the Persistence of Underdevelopment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 637-650, July.
    11. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 18(2), pages 155-162, April.
    12. Rodolphe Dos Santos Ferreira & Teresa Lloyd-Braga, 2002. "Can market power sustain endogenous growth in overlapping-generations economies?," Economic Theory, Springer, Springer, vol. 20(1), pages 199-205.
    13. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 449-60, March.
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