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The Kalai-Smorodinsky Solution in Labor-Market Negotiations


  • Thorsten Bayindir-Upmann
  • Anke Gerber


Authors who consider efficient bargaining on the labor market predominantly focus on the Nash-bargaining solution. It seems, however, that actual labor market negotiations between an employers’ federation and a labor union are often characterized by mutual concessions, which may be accounted for by an application of the Kalai-Smorodinsky solution to labor-market negotiations. Correspondingly, we investigate how a government can influence the equilibrium on the labor market by changing the reservation wage when the equilibrium is determined by the Kalai-Smorodinsky solution. We find that the induced employment effects may differ substantially when compared with the Nash bargaining solution. Hence, substituting the Kalai-Smorodinsky by the Nash bargaining solution is not innocuous, when actual negotiations are characterized by mutual incremental concessions.

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  • Thorsten Bayindir-Upmann & Anke Gerber, 2003. "The Kalai-Smorodinsky Solution in Labor-Market Negotiations," CESifo Working Paper Series 941, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_941

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    References listed on IDEAS

    1. Kalai, Ehud, 1977. "Proportional Solutions to Bargaining Situations: Interpersonal Utility Comparisons," Econometrica, Econometric Society, vol. 45(7), pages 1623-1630, October.
    2. Fuest, Clemens & Huber, Bernd, 2000. "Why do governments subsidise investment and not employment?," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 171-192, October.
    3. Petrakis, Emmanuel & Vlassis, Minas, 2000. "Endogenous scope of bargaining in a union-oligopoly model: when will firms and unions bargain over employment?," Labour Economics, Elsevier, vol. 7(3), pages 261-281, May.
    4. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
    5. Garino, Gaia & Martin, Christopher, 2000. "Efficiency wages and union-firm bargaining," Economics Letters, Elsevier, vol. 69(2), pages 181-185, November.
    6. Strand, Jon, 2002. "Wage bargaining and turnover costs with heterogenous labor and perfect history screening," European Economic Review, Elsevier, vol. 46(7), pages 1209-1227, July.
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    Cited by:

    1. Wesselbaum, Dennis, 2009. "Firing costs in a New Keynesian model with endogenous separations," Kiel Working Papers 1550, Kiel Institute for the World Economy (IfW).

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    labor market negotiations; Kalai-Smorodinsky solution; Nash-bargaining solution; reservation wage; fiscal and social policies;

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