Pareto-Nash Reversion Strategies: Three Period Dynamic Co-operative Signalling with Sticky Efficiency Wages

In this paper, the Nash equilibrium reversion is used as an optimal tool for clearing dynamic prices and wages. The balanced growth path of the efficiency wage and the outcome of repeated household/firm wage bargaining decisions are determined by various exogenous competitive rigidities. A location model is pursued to explore the extent to which a downstream spatial co-operation agreement might affect the price equilibrium. There is also an endogenous hiring function and a knowledge base which is increasing in output, as is the real wage. As the article demonstrates, after accounting for real rigidities in the baseline model, the effect of wage growth on household utility through staggered bargaining can be best catered for by adopting a policy of point scoring on the mobility of skilled labour against the model’s key rigidities. Finally, labour mobility is explored. Mobility point scores, which serve to encourage mobility from skilled labour within the model, not only increase the knowledge base but also place upward pressure on nominal wage growth.