Notesale: Turn your study into money

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Explain what a bargaining situation is and give an example of such a situation
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(6 marks)
A bargaining situation is a situation in which two or more players have a common interest to co-operate (can engage in
mutually beneficial trade), but have conflicting interests over exactly how to co-operate (terms of trade)
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Another individual, called Mohan, is willing to pay up to £70,000 for Aruna’s house; that is, he values her house at
£70,000
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This means that in this situation these two individuals have a common interest to trade
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What is the Outside Option Principle? Explain why it takes the form that it does
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The bargaining outcome is not affected by non credible outside options
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If one player's outside offer is greater than the current share of the pie, the other player will match it and keep the rest
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Contrary to what is often suggested, OOPS tells us that having an outside option (such as an outside job offer) will not
necessarily increase your bargaining power; it will not necessarily enable an employee to extract a higher wage from her
current employer
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It is no good approaching your employer and saying, ‘I have just been made an attractive job offer
that will pay me £65,000 per year, so please raise my wage, or else I quit’
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This response is based on the plausible presumption that the employee’s threat to quit unless her wage is raised is
empty (not credible); it is not in her interest to carry out the threat (ex-post)
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Only credible threats and credible promises matter

Describe the Nash Bargaining Solution and apply it to a bargaining situation of your choice
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(9 marks)
The Nash Bargaining Solution, developed by Nash (1953) assumes the Coase Theorem applies, and that two parties
reach an agreement to strike a deal (so it ignores the efficiency question) and focusses on how the surplus will be
distributed
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The players agree to give each other a share of the cake (which gives them utility equal to the utility they obtain from not
reaching an agreement), and then they split equally the remaining surplus n - dA - dB (in the case of symmetric Nash
Bargaining solution where theta = 0
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Symmetric Nash Bargaining Solution is a specific form of the Asymmetric Nash Bargaining solution, where theta = 0
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Therefore, it deals with inside options
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We can apply the Nash Bargaining Solution to a case of wage bargaining
A wage negotiation between an employee, E and the firm, F occurs
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5[n-Da-Db] even if dw < w* and is not credible
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2/3
Using an example or otherwise, explain the difference between inside options and outside options in long-term
relationships
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(7 marks)
In a long-term relationship such as a marriage, the division of marital surplus depends on the relative size of each
spouses’ inside and outside options
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The strength of their bargaining positions depends on the relative size of their inside and outside options
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The OOP states the outside option will have no impact on bargaining power
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If their inside options are of equal size, then the couple would split the marital surplus
equally
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Their inside options are their payoffs from temporary disagreement: remaining married but with generally uncooperative
behaviour (such as constant fights and arguments, refusing to undertake various domestic duties, making poor
decisions about important matters, and making life difficult for each other)
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As the husband’s inside option is relatively smaller,
he is more eager to strike a deal, which means the wife has more bargaining power and can negotiate a bigger share of
the surplus for herself
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Their outside options are the payoffs that they obtain from divorce, which might, for example, be their payoffs from
being single, or from finding an alternative partner
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The husband’s threat to seek divorce is now credible, and will solely determine the division of the surplus
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A key principle is as follows
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But, when one player’s outside option is sufficiently attractive, both players’ inside options have no impact on the
bargaining outcome; the player with the attractive outside option gets the more favourable deal
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Indeed, if divorce
is sufficiently attractive to both individuals (relative to the size of the marital surplus), then the couple are likely to get
divorced
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(20 marks)
Using the theory of bargaining or otherwise, discuss which factors and/or policies can improve the welfare of
married women
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Therefore, society has
looked at what it can do to increase x^F and tackle gender inequality
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In poorer parts of the world, when a household is constrained in terms of resources to allocate to their children’s
education, there is a bias towards the male child
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Indeed, better educated women tend to get better deals from their marriages
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In top regime (x*A), increasing wages of women wF (because she gets a better job) will increases woman’s income
and thus dF (inside), which allows the woman to negotiate a better deal inside the marriage
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Although a
married woman may choose not to seek such employment, her potential threat to be able to obtain it would now be
credible
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So woman’s share n - DF increases, but not by increasing bargaining power, but by increasing total size
of pie (more surplus to divide)
There is also the possibility to shift regimes 1 to 2, so she’ll still be better off, but by a different magnitude
Education may also increase a married woman’s bargaining power by enhancing her confidence to be able to haggle
(and make proposals) over the partition of the marital surplus; uneducated women, in contrast, are more likely to accept
almost any proposal made by their husbands (and thus, they are likely to obtain relatively poor deals)
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Folbre () proposes an interesting possibility that the process of caring for children creates altruistic preferences, a type of
addiction with positive consequences for children (and probably for society) but negative economic consequences for
mothers (higher hF)
Therefore, a policy which aims to increase the amount of time the father spends at home during early stages of infancy
may increase his bond with the child and increase his preference for household public goods (hM)
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How does policy change these preference parameters?

Many governments have focussed on a providing a strong social safety net for married women with children as an exit
alternative to their marriages, with the idea that low-income women with young children will have more marital
bargaining power under a strong safety net system than under a weak one
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Divorce is looked down upon culturally in many parts of the world
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DF may be small and DM is large, so we are in regime 3
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Because x*F > DM in many
cases, the females may be unaffected, but because DM > x*M already, this policy may increase DM even further
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Since improving the outside options too much raises the risk of divorce
an alternative strategy is to make divorce somewhat more painful, and, at the same time, significantly improve the
quality and quantity of state-provided child care
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The non-intuitive result is that making divorce more painful may actually reduce DM and DF, and since DM>DF will have
a beneficial effect on the woman, since it may shift regimes from 3rd (n-DM) to first (x*F)
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