Bargaining and Economic Allocations

Bargaining over the Surplus

• Coercive Allocations vs. Voluntary Allocations
  • Coercive Allocations:
  • If Bruno can coerce Angela, he maximizes the distance between Angela's feasible frontier and her survival constraint.
  • Example allocation (B):
    • Angela: 13 hours of leisure, 11 hours of work
    • Production: 10 bushels
    • Bruno takes 6 bushels, leaving Angela with 4 (survival minimal).
  • Voluntary Allocations:
  • If Angela can reject Bruno’s offer, he maximizes the distance between her feasible frontier and her reservation indifference curve.
  • Example allocation (D):
    • Angela: 16 hours of leisure, 8 hours of work
    • Production: 9 bushels
    • Bruno charges 4.5 bushels in rent, leaving Angela with 4.5 bushels.
  • Maximizing the Surplus:
    • Voluntary agreements seek to optimize the surplus.

Historical Context of Coercion

• Slavery and Economic Rents (Pre and Post 1865):
  • Until 1865, plantation owners used violent coercion to extract rents from slaves.
  • After 1865, landlords used more voluntary agreements to extract economic rents from ex-slaves.

The 40 Acres and a Mule Initiative

• General Sherman’s Order (1865):
  • Proposed grants of 40 acres and a mule as reparations to ex-slave families.
  • Allowed for potential independence as farmers instead of sharecropping.
  • Ultimately, lands were returned to former slave owners; ex-slaves remained landless.
  • Value of this land today estimated at hundreds of thousands of dollars.

Economic Efficiency Curves

• Pareto Efficiency Curve:
  • When Angela acts as an independent farmer, she selects allocation C.
  • If she is landless, she may accept allocation D.
  • Points between C and D are considered Pareto efficient.
  • At allocation G, Angela may receive additional rent but reduce Bruno’s.
  • Marginal Rate of Substitution (MRS) and Marginal Rate of Transformation (MRT):
  • MRS at D = MRT at C indicates economic efficiency.

The Role of Strikes in Bargaining

• Example of Bread and Roses Strike (1912):
  • Striking workers succeeded in negotiating better wages for a reduced workday.
• Allocation F Post-Strike:
  • New deal: 4 hours of work/day for 4.5 bushels (a form of minimum wage).
  • Inefficient because: MRS ≠ MRT, total surplus less than the maximum.

Redistribution and Economic Dynamics

• To improve conditions post-strike, Angela could work more with allocations G and H being preferable to F.
• Potential allocation J could result in higher output, increasing both Angela's and Bruno's benefits while aiming for efficiency.

Efficiency vs Fairness in Allocations

• Determining Efficiency:
  • Allocations D, G, H, and C are efficient, while E and F are not.
• Considerations of fairness and the allocation that distributes resources fairly must be examined.

Analysis of Economic Inequalities

• Technological advancements have not led to increased wages for British and U.S. workers over significant periods.
• Lessons Learned:
  1. Dominance in allocation power results in concentrated surplus capture by the powerful.
  2. Exploited groups can enhance their economic standing through political means.
  3. Reducing inequality may boost surplus without necessarily enhancing every party’s welfare (no Pareto improvement).
  4. Support for equity in institutions depends on collective views of fair practices and distribution.