Pareto-Nash Reversion Strategies: Three Period Dynamic Co-operative Signalling with Sticky Efficiency Wages

TL;DR

This paper models a three-period dynamic cooperative signaling framework using Nash equilibrium reversion to analyze wage and price setting, emphasizing the impact of rigidities and mobility on growth and household utility.

Contribution

It introduces a novel three-period model incorporating Nash reversion strategies, spatial cooperation, and mobility scoring to better understand wage dynamics and growth.

Findings

Wage growth impacts household utility through staggered bargaining.

Mobility point scores increase the knowledge base and upward pressure on wages.

Rigidities significantly influence the balanced growth path and bargaining outcomes.

Abstract

This paper uses Nash equilibrium reversion as an optimal tool for clearing dynamic prices and wages. Various exogenous competitive rigidities determine the balanced growth path of the efficiency wage and the outcome of repeated household/firm wage bargaining decisions. A location model is used to explore the extent to which a downstream spatial cooperation agreement might affect the price equilibrium. There is also an endogenous hiring function and a knowledge base that is increasing in output as is the real wage. As the article demonstrates after accounting for real rigidities in the baseline model the effect of wage growth on household utility through staggered bargaining can be best captured by adopting a policy of point scoring on the mobility of skilled labor against the model's key rigidities. Mobility point scores which serve to encourage mobility from skilled labor within the model not only increase the knowledge base but also place upward pressure on nominal wage growth.