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Entry threats and insufficiency in efficient bargaining

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  • Rupayan Pal

    ()
    (Indira Gandhi Institute of Development Research)

  • Bibhas Saha

    ()
    (University of East Anglia)

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 Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2010-016.

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Length: 18 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:ind:igiwpp:2010-016

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

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