Static Bargaining Models

Abstract

The Nash solution to bargaining is widely used in applied work especially in the literature on wage bargaining between a firm and a union (see, e.g., Oswald (1985), Booth (1996) or Layard et al. (1991)). In this section we will show the rationale behind the Nash bargaining solution (NBS in the following). The NBS was put forward in a paper by John Nash (1950) in which he uses an axiomatic approach to find a solution to bargaining situations. Axiomatic means that he does not look at the bargain itself, i.e., the procedure of offer and counteroffer, but only determines the outcome by imposing properties (axioms) a solution should fulfil. As such, this solution to a bargaining problem does not rest on proper game theoretic grounds, but only looks at the set of possible outcomes and gradually narrows the set by excluding all solutions that do not fulfil these axioms. Another important point is that only non zero sum bargains are considered, i.e., a solution must be mutually beneficial to the bargaining partners.