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Entry Threats, and Inefficiency in ‘Efficient Bargaining’

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  • Rupayan Pal

    (Indira Gandhi Institute of Development Research)

  • Bibhas Saha
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    Abstract

    We examine whether the outcome of bargaining over wage and employment between an incumbent firm and a union remains efficient under entry threat. The workers\' reservation wage is not known to the entrant, and entry is profitable only against the high reservation wage. The entrant observes the pre-entry price, but not necessarily the wage agreements. When wage is not observed, contracts feature over-employment. Under separating equilibrium the low type is over-employed, and under pooling equilibrium the high type is over-employed. But when wage is observed, pooling equilibrium may not always exist, and separating equilibrium does not involve any inefficiency.

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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Labor Economics Working Papers with number 23020.

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    Date of creation: Jan 2010
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    Handle: RePEc:eab:laborw:23020

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    Related research

    Keywords: Efficient Bargaining; Entry Threat; Signalling; Inefficiency;

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    References

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    1. Paul Milgrom & John Roberts, 1998. "Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis," Levine's Working Paper Archive 245, David K. Levine.
    2. Dewatripont, Mathias, 1987. "Entry deterrence under trade unions," European Economic Review, Elsevier, Elsevier, vol. 31(1-2), pages 149-156.
    3. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 896-908, December.
    4. Mathias Dewatripont, 1988. "The Impact of Trade Unions on Incentives to Deter Entry," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 191-199, Summer.
    5. Ohnishi, Kazuhiro, 2001. "Lifetime Employment Contract and Strategic Entry Deterrence: Cournot and Bertrand," Australian Economic Papers, Wiley Blackwell, Wiley Blackwell, vol. 40(1), pages 30-43, March.
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