Game Theory and Public Policy, SECOND EDITION
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Game Theory and Public Policy, SECOND EDITION

Roger A. McCain

This book provides a critical, selective review of concepts from game theory and their applications in public policy, and further suggests some modifications for some of the models (chiefly in cooperative game theory) to improve their applicability to economics and public policy.
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Chapter 14: Bargaining and the determination of wages

Roger A. McCain


This part of the book has explored the view of the business firm as a cooperative coalition. Since the costs of coalition formation are sunk, and the same costs limit the formation of competitive firms, the successful coalitions we observe typically will realize surpluses. As a result bargaining power plays a key part in the models of Chapters 11 and 13. In these models the wage includes a share of the surplus and this is necessarily positive, since otherwise employees would not recover the sunk cost of their participation in labor markets. Thus, even in the absence of explicit collective bargaining, a labor share of the surplus must be determined, and the determinants of that share constitute (for the purposes of this book) bargaining, implicit if not explicit. Accordingly, this chapter reconsiders bargaining power and the determination of wages.

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