The Nash Bargaining Solution in Labor Market Analysis

Gilbert Skillman

No 2020-005, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: The non-symmetric Nash bargaining solution is frequently applied in the study of labor market outcomes, but the axiomatic approach in which it is grounded offers little guidance as to the determinants of agents’ threat points and relative bargaining power. This paper modifies the Rubinstein-Wolinsky (1985) sequential matching and bargaining model to study the role of individual bargaining costs, status quo payoffs, and outside options in determining bargaining power weights and threat points in Nash bargaining solution. Key results differentiate the strategic implications of fixed and time discount-based bargaining costs and demonstrate the general validity of the Nash bargaining solution in characterizing steady-state market outcomes in which outside options are endogenously determined. In this scenario, agents’ relative bargaining weights depend on their matching probabilities.

Keywords: Nash bargaining solution; strategic bargaining; outside options; status quo payoffs; labor markets; matching and bargaining (search for similar items in EconPapers)
JEL-codes: C78 J31 J52 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-04
New Economics Papers: this item is included in nep-com, nep-gth, nep-mic and nep-ore
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Journal Article: The Nash bargaining solution in labor market analysis (2022)
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