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Forward induction in a wage repeated negotiation

  • Gonzalo Olcina Vauteren

    ()

    (Universitat de València)

  • Vicente Calabuig Alcantara

    (Universitat de València)

We present a finitely repeated bargaining game with complete information. The stage game is asimultaneous demand game with a fall-back position for both parties, in which we allow one party(say, the union) to estabilish a credible commitment to strike if it is not offered a determinedwage. We try to refine the equilibrium set of the repeated game using a formulation of ForwardInduction. In particular, we say that a path of Nash Equilibria in the repeated game is Consistentwith Forward Induction (CFI) if for all period t the cost of deviation (if it is strictly positive) is greateror equal than the maximal net gain in CFI paths with t-1 horizon. We present several cases in which the average payoff for the union in any CFI path, when thehorizon tends to infinity, is his preferred wage. These results are similar to those obtained with thereputation effects approach and reveal some connection between the FI notion and the approachconsisting of perturbing the game with some incomplete information.

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File Function: Fisrt version / Primera version, 1997
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 1997-16.

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Length: 28 pages
Date of creation: Jul 1997
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:1997-16
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  1. D. Fudenberg & David K. Levine, 1989. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 508, David K. Levine.
  2. Gonzalo Olcina Vauteren & Vicente Calabuig Alcantara, 1997. "Bargainning, reputation and strikes," Working Papers. Serie AD 1997-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. van Damme, Eric, 1989. "Stable equilibria and forward induction," Journal of Economic Theory, Elsevier, vol. 48(2), pages 476-496, August.
  4. Dekel, Eddie, 1989. "Simultaneous Offers and the Inefficiency of Bargaining: A Two-Period Example," Department of Economics, Working Paper Series qt2b0402g4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
  6. Gonzalo Olcina, 1997. "Forward Induction In Games With An Outside Option," Theory and Decision, Springer, vol. 42(2), pages 177-192, March.
  7. Ponssard, Jean-Pierre, 1991. "Forward induction and sunk costs give average cost pricing," Games and Economic Behavior, Elsevier, vol. 3(2), pages 221-236, May.
  8. Osborne, Martin J., 1990. "Signaling, forward induction, and stability in finitely repeated games," Journal of Economic Theory, Elsevier, vol. 50(1), pages 22-36, February.
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