Alternating Offers Union-Firm Bargaining: Order of Play and Efficiency

This paper shows that the Rubinstein alternating offers model can be modified to provide a Pareto superior outcome in the context of the right-to-manage union-firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the union and the firm engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game and the equilibrium wage is, therefore, unique. In the second example we examine a two-part-tariff alternating offers bargaining protocol, where the firm and the union bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, “socially” optimal.