Working Papers

Disagreement Points In Wage Bargaining


Workers face declining pay-offs during a strike. The consequence of this is explored in a noncooperative sequential bargainingsubgame perfect equilibrium wage is a weighted average of the standard bargaining solution game of alternating offers. It turns out that the in the literature and the outside option of the workers. The outside option affects the wage even when it does not constrain the outcome nor enters any of the parties utility functions. In a cooperative framework the disagreement point of the workers should according to this model be represented by a weighted average of the strike pay and the outside option,the weights being determined by the length of time that the workers credibly can threaten to keep on striking. This paper thus gives support from a “corresponding” non-cooperative bargaining game to the rather prevalent use of models where the unemployment rate enters the Nash product determining bargained wages. Equilibrium unemployment prevails in an economy with wage bargaining at the firm level and limits on the workers ability to strike forever.