Entry Threats, and Inefficiency in ‘Efficient Bargaining’

Rupayan Pal and Bibhas Saha
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Rupayan Pal: Indira Gandhi Institute of Development Research

Labor Economics Working Papers from East Asian Bureau of Economic Research

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.

Keywords: Efficient Bargaining; Entry Threat; Signalling; Inefficiency (search for similar items in EconPapers)
JEL-codes: D43 J51 J58 L12 (search for similar items in EconPapers)
Date: 2010-01
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