Knowledge that Transforms

This paper defines a concept, a worker's trust fund, which is useful in analyzing optimal age-earnings profiles. The trust fund represents what a worker loses if dismissed from a job for shirking. In considering whether to work or shirk, a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort. This concept is used to show that the implicit bonding in upward sloping age-earnings profiles is not a perfect substitute for an explicit up-front performance bond (or employment fee). It is also shown that the second-best optimal earnings profile in the absence of an up-front employment fee pays total compensation in excess of market clearing in a variety of stylized cases.

Rosa Barbolla, Luis C. Corchón; An Elementary Proof of the Existence of a Competitive Equilibrium in a Special Case*, The Quarterly Journal of Economics, V

A recent literature has shown that asymmetric information about a firm's profitability does not by itself explain strikes of substantial length if the firm and workers can bargain very frequently without commitment. In this paper we show that substantial strikes are possible if (a) there is a small (but not insignificant) delay between offers; and (b) a strike-bound firm may experience a decline in profitability after a certain point. A brief discussion of the ability of the theory to explain the data on strikes is included.

In the economic modeling of bargaining, outside options have often been naively treated by taking them as the disagreement payoffs in an application of the Nash bargaining solution. The paper contrasts this method of predicting outcomes with that obtained from an analysis of optimal strategic behavior in a natural game-theoretic model of the bargaining process. The strategic analysis predicts that the outside options will be irrelevant to the final deal unless a bargainer would then go elsewhere. An experiment is reported which indicates that this prediction performs well in comparison with the conventional predictor.