Bargaining

Bargaining (without abstracts)

“Bargaining with a Shared Interest: The Impact of Employee Stock Ownership Plans on Labor Disputes,” (with Hamid Mehran and Joseph Tracy) Working Paper, University of Maryland, June 2010.

“Unions, Bargaining and Strikes,” (with Joseph S. Tracy) in John T. Addison and Claus Schnabel, eds., International Handbook of Trade Unions, Cheltenham, UK: Edward Elgar, Chapter 4, 86-117, 2003.

“Bargaining with Incomplete Information,” (with Lawrence M. Ausubel and Raymond J. Deneckere), Robert J. Aumann and Sergiu Hart, eds., Handbook of Game Theory, Vol. 3, Amsterdam: Elsevier Science B.V., Chapter 50, 1897-1945, 2002.

“The Effect of Collective Bargaining Legislation on Strikes and Wages,” (with Morley Gunderson and Joseph S. Tracy) Review of Economics and Statistics, 81:3, 475-487, 1999.

“Impacts of Strike Replacement Bans in Canada,” (with Morley Gunderson and Joseph S. Tracy), Labor Law Journal, 50:3, 173-179, Fall 1999.

“The Use of Strike Replacements in Union Contract Negotiations: the U.S. Experience 1980–1989,” (with Joseph S. Tracy) Journal of Labor Economics, 16:4, 667-701, 1998.

“Efficient Relocation of Spectrum Incumbents,” (with Evan Kwerel and John Williams) Journal of Law and Economics, 41, 647-675, October 1998.

“Deception and Mutual Trust: A Reply to Strudler,” (with J. Gregory Dees) Journal of Business Ethics, 5, 813–822, 1995. Reprinted in Carrie Menkel-Meadow and Michael Wheeler (eds.), What’s Fair, John Wiley & Sons, 2004.

“Wage Bargaining with Time-Varying Threats,” (with Joseph S. Tracy), Journal of Labor Economics, 12, 594–617, 1994.

“The Determinants of U.S. Labor Disputes,” (with Joseph S. Tracy), Journal of Labor Economics, 12, 180–209, 1994.

“Promoting Honesty in Negotiation: An Exercise in Practical Ethics,” (with J. Gregory Dees) Business Ethics Quarterly, 3, 359-394, 1993. Reprinted in Patricia Werhane and Tom Donalson, Ethical Issues in Business: A Philosophical Approach, Prentice-Hall, 1996, and Carrie Menkel-Meadow and Michael Wheeler (eds.), What’s Fair, John Wiley & Sons, 2004.

“Strikes and Holdouts in Wage Bargaining: Theory and Data,” (with Joseph S. Tracy) American Economic Review, 82, 100–121, 1992. Reprinted in Bengt Holmstrom, Paul Milgrom, and Alvin E. Roth (eds.),  Game Theory in the Tradition of Bob Wilson, Berkeley Electronic Press, www.bepress.com/wilson, May 2002.

“Strategic Delay in Bargaining with Two-Sided Uncertainty,” Review of Economic Studies, 59, 205–225, 1992.

“Dynamic Bargaining with Transaction Costs,” Management Science, 37, 1221–1233, 1991.

“Shrewd Bargaining on the Moral Frontier: Toward a Theory of Morality in Practice,” (with J. Gregory Dees) Business Ethics Quarterly, 1, 135-167, 1991.

“Sequential Bargaining Mechanisms,” in Game-Theoretic Models of Bargaining, Alvin Roth (ed.), Cambridge University Press, Chapter 8, 149–179, 1985.

“Bargaining with Incomplete Information: An Infinite-Horizon Model with Two-Sided Uncertainty,” Review of Economic Studies, 51, 579–593, 1984.


Bargaining (with abstracts)

“Bargaining with a Shared Interest: The Impact of Employee Stock Ownership Plans on Labor Disputes,” (with Hamid Mehran and Joseph Tracy) Working Paper, University of Maryland, June 2010.

Bargaining often occurs between parties with some shared interest. Partnerships, joint ventures, and cross ownership are examples. We extend standard bargaining models to allow for joint ownership. Joint ownership reduces costly bargaining disputes, as bargainers’ interests are more aligned. We then test the theory with collective bargaining data, where employee stock ownership plans (ESOPs) are the source of joint ownership. The theory predicts that ESOPs will lead to a reduction in strike incidence and the fraction of labor disputes that involve a strike. We examine these predictions using U.S. bargaining data from 1970-1995. The data suggest that ESOPs do increase the efficiency of labor negotiations by shifting the composition of disputes away from costly strikes. Consistent with improved bargaining efficiency, we find that the announcement of a union ESOP leads to a 50% larger stock market reaction as compared to the announcement of a nonunion ESOP.

“Unions, Bargaining and Strikes,” (with Joseph S. Tracy) in John T. Addison and Claus Schnabel, eds., International Handbook of Trade Unions, Cheltenham, UK: Edward Elgar, Chapter 4, 86-117, 2003.

Labor disputes are an intriguing feature of the landscape of industrialized economies. Economists have had a long-standing interest in formulating a framework for understanding and analyzing labor disputes. The development of noncooperative bargaining theory provided the tools for a theory of collective bargaining and labor disputes. A general aim of this theoretical development is to inform policy makers of the efficiency and equity effects associated with different labor laws and institutions that govern and shape the collective bargaining process. While this new literature is still evolving, it can already offer many insights into the interplay between policy and the bargaining process. In this chapter, we will provide a sketch of this new collective bargaining theory and illustrate its ability to aid in policy analysis. We will also relate the predictions of the model to existing empirical findings in the literature.

“Bargaining with Incomplete Information,” (with Lawrence M. Ausubel and Raymond J. Deneckere), Robert J. Aumann and Sergiu Hart, eds., Handbook of Game Theory, Vol. 3, Amsterdam: Elsevier Science B.V., Chapter 50, 1897-1945, 2002.

A central question in economics is understanding the difficulties that parties have in reaching mutually beneficial agreements. Informational differences provide an appealing explanation for bargaining inefficiencies. This chapter provides an overview of the theoretical and empirical literature on bargaining with incomplete information. The chapter begins with an analysis of bargaining within a mechanism design framework. A modern development is provided of the classic result that, given two parties with independent private valuations, ex post efficiency is attainable if and only if it is common knowledge that gains from trade exist. The classic problems of efficient trade with one-sided incomplete information but interdependent valuations, and of efficiently dissolving a partnership with two-sided incomplete information, are also reviewed using mechanism design. The chapter then proceeds to study bargaining where the parties sequentially exchange offers. Under one-sided incomplete information, it considers sequential bargaining between a seller with a known valuation and a buyer with a private valuation. When there is a “gap” between the seller’s valuation and the support of buyer valuations, the seller-offer game has essentially a unique sequential equilibrium. This equilibrium exhibits the following properties: it is stationary, trade occurs in finite time, and the price is favorable to the informed party (the Coase Conjecture). The alternating-offer game exhibits similar properties, when a refinement of sequential equilibrium is applied. However, in the case of “no gap” between the seller’s valuation and the support of buyer valuations, the bargaining does not conclude with probability one after any finite number of periods, and it does not follow that sequential equilibria need be stationary. If stationarity is nevertheless assumed, then the results parallel those for the “gap” case. However, if stationarity is not assumed, then instead a folk theorem obtains, so substantial delay is possible and the uninformed party may receive substantial surplus. The chapter also briefly sketches results for sequential bargaining with two-sided incomplete information. Finally, it reviews the empirical evidence on strategic bargaining with private information by focusing on one of the most prominent examples of bargaining: union contract negotiations.

“The Effect of Collective Bargaining Legislation on Strikes and Wages,” (with Morley Gunderson and Joseph S. Tracy) Review of Economics and Statistics, 81:3, 475-487, 1999.

Using Canadian data on large, private-sector contract negotiations from January 1967 to March 1993, we find that wages and strikes are substantially influenced by labor policy. The data indicate that conciliation policies have largely been ineffective in reducing strike costs. In contrast, contract reopener provisions appear to make both unions and firms better off by reducing negotiation costs without systematically affecting wage settlements. Legislation banning the use of replacement workers appears to lead to higher strike costs both by increasing the frequency and duration of strikes.

“Impacts of Strike Replacement Bans in Canada,” (with Morley Gunderson and Joseph S. Tracy), Labor Law Journal, 50:3, 173-179, Fall 1999.

In the labor relations area no issue generates as much controversy and division between labor and management as does the legislative ban on replacement workers. In the United States, the issue of a ban on permanent replacement workers has come before Congress four times since 1988, although the only action taken has been an executive order in 1995, banning the government from doing business with firms that use permanent replacements (Cramton and Tracy 1998). In Canada, where labor matters are under provincial jurisdiction, legislative bans on permanent replacement workers exist in most jurisdictions (except New Brunswick, Nova Scotia and Prince Edward Island), either directly or indirectly by mandating that striking workers have the right to their job once the strike is over — they cannot be permanently replaced by replacement workers who may have been temporarily hired during the strike. The more stringent ban on the use of temporary replacement workers also has been in place in Quebec since 1978, in British Columbia since 1993, and in Ontario between 1993 and 1995

“The Use of Strike Replacements in Union Contract Negotiations: the U.S. Experience 1980–1989,” (with Joseph S. Tracy) Journal of Labor Economics, 16:4, 667-701, 1998.

It is argued in many circles that a structural change occurred in U.S. collective bargaining in the 1980s. Strike incidence declined, dispute incidence increased, and the composition of disputes shifted away from strikes and toward holdouts. We investigate the extent to which the hiring of replacement workers can account for these changes. For a sample of over 300 major strikes since 1980, we estimate the likelihood of replacements being hired. We find that the risk of replacement is lower for bargaining units with more experienced workers, and declines during tight labor markets. The composition of disputes shifts away from strikes as the predicted risk of replacement increases. In addition, the overall level of disputes increases as a result of the shift in the composition of disputes. Based on our estimates reducing the predicted replacement risk faced by bargaining units to the pre-1982 levels would have lead to a reduction in the dispute incidence by around 5 percentage points, an increase in the fraction of disputes involving a strike by around 4 percentage points, and an increase in the strike incidence by around 0.8 percentage points.

“Efficient Relocation of Spectrum Incumbents,” (with Evan Kwerel and John Williams) Journal of Law and Economics, 41, 647-675, October 1998.

Changes in technologies and in consumer demands have made prior radio spectrum allocations far from efficient. To address this problem the FCC has recently reallocated spectrum for more flexible use in bands that are partially occupied by incumbent license holders. Often, it is necessary for the new license holder to relocate incumbents to make efficient use of the spectrum. Regulations structuring the negotiation between incumbent and new entrant can promote efficiency. In particular, giving the new entrant the right to move the incumbent with compensation can reduce negotiation costs and promote efficiency when there is private information about spectrum values but good public information about the cost of relocating the incumbent. We examine the experience of broadband PCS entrants in relocating microwave incumbents. We conclude with some remarks on how these ideas might be applied to digital television spectrum.

“Deception and Mutual Trust: A Reply to Strudler,” (with J. Gregory Dees) Journal of Business Ethics, 5, 813–822, 1995. Reprinted in Carrie Menkel-Meadow and Michael Wheeler (eds.), What’s Fair, John Wiley & Sons, 2004.

Alan Strudler has written a stimulating and provocative article about deception in negotiation. He presents his views, in part, in contrast with our earlier work on the Mutual Trust Perspective. We believe that Strudler is wrong in his account of the ethics of deception in negotiation and in his quick dismissal of the Mutual Trust Perspective. Though his mistakes may be informative, his views are potentially harmful to business practice. In this paper, we present arguments against Strudler’s position and attempt to salvage the Mutual-Trust Perspective from his attack. Strudler’s work reaffirms the need for a more pragmatic approach to business ethics. We close the paper with a renewed call for more constructive and practical approaches to business ethics research.

“Wage Bargaining with Time-Varying Threats,” (with Joseph S. Tracy), Journal of Labor Economics, 12, 594–617, 1994.

We study wage bargaining in which the union is uncertain about the firm’s willingness to pay and threat payoffs vary over time. Strike payoffs change over time as replacement workers are hired, as strikers find temporary jobs, and as inventories or strike funds run out. We find that bargaining outcomes are substantially altered if threat payoffs vary. If dispute costs increase in the long-run, then dispute durations are longer, settlement rates are lower, and wages decline more slowly during the short-run (and may even increase). The settlement wage is largely determined from the long-run threat, rather than the short-run threat.

“The Determinants of U.S. Labor Disputes,” (with Joseph S. Tracy), Journal of Labor Economics, 12, 180–209, 1994.

We present a bargaining model of union contract negotiations, in which the union decides between two threats: the union can strike or continue to work under the expired contract. The model makes predictions about the level of dispute activity and the form the disputes take. Strike incidence increases as the strike threat becomes more attractive, because of low unemployment or a real wage drop during the prior contract. We test these predictions by estimating logistic models of dispute incidence and dispute composition for U.S. labor contract negotiations from 1970 to 1989. We find empirical support for the model’s key predictions, but these associations are weaker after 1981.

“Promoting Honesty in Negotiation: An Exercise in Practical Ethics,” (with J. Gregory Dees) Business Ethics Quarterly, 3, 359-394, 1993. Reprinted in Patricia Werhane and Tom Donalson, Ethical Issues in Business: A Philosophical Approach, Prentice-Hall, 1996, and Carrie Menkel-Meadow and Michael Wheeler (eds.), What’s Fair, John Wiley & Sons, 2004.

In a competitive and morally imperfect world, business people are often faced with serious ethical challenges. Harboring suspicions about the ethics of others, many feel justified in engaging in less-than-ideal conduct to protect their own interests. The most sophisticated moral arguments are unlikely to counteract this behavior. We believe that this morally defensive behavior is responsible, in large part, for much undesirable deception in negotiation. Drawing on recent work in the literature of negotiations, we present some practical guidance on how negotiators might build trust, establish common interests, and secure credibility for their statements thereby promoting honesty We also point out the types of social and institutional arrangements, many of which have become commonplace, that work to promote credibility, trust, and honesty in business dealings. Our approach is offered not only as a specific response to the problem of deception in negotiation, but as one model of how research in business ethics might offer constructive advice to practitioners.

“Strikes and Holdouts in Wage Bargaining: Theory and Data,” (with Joseph S. Tracy) American Economic Review, 82, 100–121, 1992. Reprinted in Bengt Holmstrom, Paul Milgrom, and Alvin E. Roth (eds.),  Game Theory in the Tradition of Bob Wilson, Berkeley Electronic Press, www.bepress.com/wilson, May 2002.

We develop a private-information model of union contract negotiations in which disputes signal a firm’s willingness to pay. Previous models have assumed that all labor disputes take the form of a strike. Yet a prominent feature of U.S. collective bargaining is the holdout: negotiations often continue without a strike after the contract has expired. Production continues with workers paid according to the expired contract. We analyze the union’s decision to strike or hold out and highlight its importance to strike activity. Strikes are more likely to occur after a drop in the real wage or a decline in unemployment.

“Strategic Delay in Bargaining with Two-Sided Uncertainty,” Review of Economic Studies, 59, 205–225, 1992.

The role of strategic delay is analyzed in an infinite-horizon alternating-offer model of bargaining. A buyer and seller are engaged in the trade of a single object. Both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly. An equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer. A bargainer expecting large gains from trade is more impatient than one expecting small gains, and hence makes concessions earlier on. Trade occurs whenever gains from trade exist, but due to the private information, only after costly delay.

“Dynamic Bargaining with Transaction Costs,” Management Science, 37, 1221–1233, 1991.

A buyer and seller alternate making offers until an offer is accepted or someone terminates negotiations. The seller’s valuation is common knowledge, but the buyer’s valuation is known only by the buyer. Impatience to reach an agreement comes from two sources: the traders discount future payoffs and there are transaction costs of bargaining. Equilibrium behavior involves either immediate trade, delayed trade, or immediate termination, depending on the size of the gains from trade and the relative bargaining costs. This contrasts with the pure discounting model where termination never occurs, and the pure transaction cost model where delayed trade never occurs.

“Shrewd Bargaining on the Moral Frontier: Toward a Theory of Morality in Practice,” (with J. Gregory Dees) Business Ethics Quarterly, 1, 135-167, 1991.

From a traditional moral point of view, business practitioners often seem overly concerned about the behavior of their peers in deciding how they ought to act. We propose to account for this concern by introducing a mutual trust perspective, where moral obligations are grounded in a sense of trust that others will abide by the same rules. When grounds for trust are absent, the obligation is weakened. We illustrate this perspective by examining the widespread ambivalence with regard to deception about one’s settlement preferences in negotiation. On an abstract level, such deception generally seems undesirable, though in many individual cases it is condoned, even admired as shrewd bargaining. Because of the difficulty in verifying someone’s settlement preferences, it is hard to establish a basis for trusting the revelations of the other party, especially in competitive negotiations with relative strangers.

“Sequential Bargaining Mechanisms,” in Game-Theoretic Models of Bargaining, Alvin Roth (ed.), Cambridge University Press, Chapter 8, 149–179, 1985.

The introductory discussion presented in this chapter considers the simplest type of sequential bargaining games in which the players’ time preferences are described by known and fixed discount rates. I begin by characterizing the class of perfect bargaining mechanisms, which satisfy the desirable properties of incentive compatibility (i.e., each player reports his type truthfully), individual rationality (i.e., every potential player wishes to play the game), and sequential rationality (i.e., it is never common knowledge that the mechanism induced over time is dominated by an alternative mechanism). It is shown that ex post efficiency is unobtainable by any incentive-compatible and individually rational mechanism when the bargainers are uncertain about whether or not they should trade immediately. I conclude by finding those mechanisms that maximize the players’ ex ante utility, and show that such mechanisms violate sequential rationality. Thus, the bargainers would be better off ex ante if they could commit to a mechanism before they knew their private information. In terms of their ex ante payoffs, if the seller’s delay costs are higher than those of the buyer, then the bargainers are better off adopting a sequential bargaining game rather than a static mechanism; however, when the buyer’s delay costs are higher, then a static mechanism is optimal.

“Bargaining with Incomplete Information: An Infinite-Horizon Model with Two-Sided Uncertainty,” Review of Economic Studies, 51, 579–593, 1984.

The resolution of any bargaining conflict depends crucially on the relative urgency of the agents to reach agreement and the information each agent has about the others’ preferences. This paper explores, within the context of an infinite-horizon bargaining model with two-sided uncertainty, how timing and information affect the rational behavior of agents when commitment is not possible. Since the bargainers are uncertain about whether trade is desirable, they must communicate some of their private information before an agreement can be reached. This need for learning, due to incomplete information about preferences, results in bargaining inefficiencies: trade often occurs after costly delay. Thus, the model provides an explanation for the inefficient bargaining behavior that appears to occur often in practice.