A MODEL OF WAGE CONTRACT BARGAINING WITH IMPLICATIONS FOR MACROECONOMIC CONTRACTING MODELS (BAYESIAN UPDATING)

CHRISTINE E BLAIR, Fordham University

Abstract

Workers and firms prefer to contract infrequently when contract negotiations are costly, resulting in long-term labor contracts. These contracts have been used to incorporate Keynesian rigidities into neoclassical macroeconomic models. These models have a role for systematic monetary policy and show that characteristics of the optimal contract are related to negotiation costs.^ This dissertation develops a model of wage contracting behavior that shows the effects contracting costs on contract length, the extent of negotiation and the likelihood of a strike. Negotiations are characterized by imperfect information and an incentive to lie or bluff on the part of each agent. They are represented by a Bayesian updating process, through which agents extract the unknown information about the other party's position.^ The optimal contract terms and number of negotiation (bargaining and strike) rounds for each party minimize the costs of negotiation. These costs include administrative costs, strike or resource costs (incurred if negotiations extend beyond contract expiration), and an inefficiency cost measuring the degree to which the negotiated contract terms differ from optimal. Each agent is assumed to take the other's behavior into account. The optimal length of negotiations and the optimal contract length, as well as conditions under which strikes can be a rational outcome of negotiations are examined.^ A macroeconomic contracting model is developed. The impact of bargaining on the optimal contract length is shown and the role for monetary policy is examined. ^

Subject Area

Economic theory

Recommended Citation

BLAIR, CHRISTINE E, "A MODEL OF WAGE CONTRACT BARGAINING WITH IMPLICATIONS FOR MACROECONOMIC CONTRACTING MODELS (BAYESIAN UPDATING)" (1986). ETD Collection for Fordham University. AAI8615704.
http://fordham.bepress.com/dissertations/AAI8615704

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