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Game Theory Research Paper

Through this term paper we are trying to shed light at the wage coordination between laborers from different states and the factors behind the same. Our focus will be on real life wage fixing situations between laborers and the landlords they work for. We also try to identify the asymmetries which may arise in the Nash bargaining solution which affects the bargaining power of the laborers. By the term wage bargaining we mean the discussions and negotiations held between the landlord and the laborer in order to come to an agreement on the level of wage rate.

Assumptions made: Real life situation in the Indian scenario. This is a two player bargaining model wherein Player 1 is the unskilled laborer employed in the agricultural sector Player 2 is the landlord who employs laborers in his land. Both the players take decision individually and not collectively. Neither of the players communicates with one another to influence the decision of the other. Each players aim is to maximize his payoff. Hence, it is assumed that players are flawless followers and perfect calculators of their best strategies.

They not only focus on their immediate income but possible future cash inflows as well. As the players are unskilled, wage determination is not on the sass of their talent but on various other external factors that shall be highlighted in the next section. The payoffs of the players have been calculated purely on the basis of monetary payments for their physical labor and exclude any kind of remuneration for costs arising from relocation, psychological stress The average payoff Of the male employee is considered for reference across all categories.

Our study focuses on the states of Kraal and Briar since there is a stark difference between the demographic and socio-economic parameters of the two states and hence can be used for a imperative study. In this paper, we try to analyses the wage bargaining situation between the landlord and an unskilled laborer in an agrarian context and make a comparison of the basic wage rate between the states of Briar and Kraal. According to the wage rate list published by the Ministry of Labor and Employment the average basic pay in Kraal is 320 and that in Briar is 91 as of June 2009 in the agricultural sector.

Nash co-operative model has been used to determine the minimum wage level in the two states taking into consideration the different asymmetries which might arise. Here, e assume that the wage bargaining is a one-shot play. Let us consider that the revenue from the cultivation to be V. The issue at hand is to reach an efficient outcome where by amount ‘V can be entirely divided between the players. Let us assume the individual payoffs to be x and y. Then, x+y=v represents the case in which the entire revenue from cultivation is divided between the landlord and the laborer.

The players contribute to the creation of revenue and hence are eligible for claim on the revenue. The investment made by the laborer is his manual work while that of the landlord is the investment that he has made in terms of the land ownership, fertilizers, tractors etc. Fifth game is symmetrical I. E. , Equivalent money value of the work done by the laborer Investment made by the landlord Then, the best solution would be to divide the returns exactly into two halves I. E. , x = y However, the real life situation involves several asymmetries which make equal division an inefficient outcome.

Such asymmetries determine the relative bargaining power of the players. NASH BARGAINING SOLUTION The bargaining power of the laborers depends on their attitude towards risk ND the fall back option of the laborers. Research shows that risk loving behavior and presence of a fall back option will lead to a higher bargaining power for the laborers and a higher wage rate. Attitude towards risk: Ownership of land largely determines the risk loving behavior of a player. A more equitable distribution of land leads to higher rate of ownership of land among the lower class.

Thus, they will be much better off without entering into the deal than a landless laborer since land serves as collateral and provides credit opportunities to the laborers. If the risk loving behavior is lone taken into consideration, both the players can be quantified to arrive at a parameter ‘r’ (risk loving behavior) which can be used to determine the payoff for each individual player. Payoff to the risk neutral person (risk dominant payoff) is given by x = M /1 +r while that of the risk averse person will be r*M/1+r.

The value Of r being small in the case of the risk-averse person, his payoff will be the smaller which explains the lower wage rate in Briar when compared to that of the Kraal. (ref) Fallback option available: Fall back option available to the laborers is: Shift in occupation sector: Equally attractive or even better minimum wages in non-agricultural sector will increase the bargaining power of the laborers because in that case, the laborer has an option to disagree to the deal and move out to other occupations.

The average base wage in the non-agriculture sector is 140 in Briar while it is 292 in Kraal. MANNER: The wage guaranteed under the ENRAGE program for the unemployed unskilled laborers shows a striking difference between the states with the state of Briar having the lowest amount of RSI. 1 22 while that of Kraal is RSI. 164 (See Appendix). This wows that the bargaining position of a laborer in Briar is weaker when compared to the same in Kraal and hence will push down the minimum wage in Briar.

Fall back option available to the landlord: Availability of labor supply determines the best alternative to a negotiated agreement BAT AN. The willingness to forgo the wage deal with a particular laborer can be spurred by the ready availability of labor and hence a higher bargaining power. This is the case in Briar where the proportion of unskilled laborers is Very high and hence they can hire laborers from outside at the reservation price.

In Kraal however, there is a dearth for manual labor owing to the higher literacy rate which urges them to take up better alternative employment options. This increases the probability of repeat relationship with the existing laborers which will motivate the landlords to pay a higher wage to them. Thus, the (BATAAN) of both the laborer and the landlord can be calculated. Let the individual Batman’s be a and b for the landlord and laborer respectively. The BATAAN of the laborer is the payoff that he receives from outside option that he chooses (MANNER, construction sector, self- employment etc. Hill that of the landlord will be the payoff that he receives from not executing the deal with player under consideration but hiring outside labor (depending on the labor supply availability). Depending on the difference in the socio-economic conditions prevailing in the society, the value taken by the factors differ and hence the relative bargaining power of the player varies. Let us consider it to be h and k for the landlord and laborer respectively. Hence the line of our concern passes through the through the BATAAN point and has a slope equal to the ratio of the bargaining power of the two persons.

In order to determine the Nash bargaining solution for each state, the graph of the wage bargain is constructed for each state and the minimum wage determined. Thus, we see that relative BATAAN value is higher for the laborers and lower for the landlords in Kraal when compared to that of Briar. Moreover, the relative bargaining power of laborers is stronger in Kraal when compared to that of their counter parts in Briar. Thus the minimum wage level will be higher in Kraal than in Briar. Is Migration a possible solution for Briar laborers?

Payoff matrix: PA (Briar Laborer) Stay (Agric Trial occupation) Migrate (To Kraal) 1 (Kraal Laborer) Stay ( Agricultural occupation) 320, 91 y, x Shift ( To Non Agricultural) 292, 144 292, z (Payoff figures are daily wage rates across two states in agriculture & non agriculture occupation. Source: Wage Rates In rural India for June 2009, Ministry of Labor & Employment) Above is the payoff matrix constructed for player 1 and player 2. PA is the laborer from Kraal while PA is the laborer in Briar.

Kraal laborer has two strategies: either to work in the agricultural sector or in the non-agricultural sector. Migration is not a choice for him because his payoff is either equal to or lower in the other dates of India. Briar laborer will have two strategies: One strategy is to stay in his state itself where he has the option to work in the agricultural side or the non-agriculture side, while other will be to migrate to other states (in this case we will only take example of Kraal) having higher wage rates than Briar where he again faces the option of whether to work in the agricultural side or non-agricultural Sector.

In Briar, the average Wage rate in agriculture is 91 while that in non-agriculture is 144. In the case of Kraal, the same for agricultural sector is 320 and for the non-agriculture sector is 292 for the bourse form Kraal. Let the wages of the laborer who migrated to the agricultural sector in Kraal ‘x’ will be lower than standard wage rates of Kraal laborers in agriculture I. E. 320, since the migrant laborers in Kraal earn lower than the native ones but will be higher than the maximum wage they can earn in Briar I. E. , 144. Hence 320 > x > 144.

Similarly, for the migrant laborers in the non-agricultural occupation the wage ‘z’ that they get in Kraal will satisfy the condition 292 > z >140 where 292 is the wage earned by the Israelite laborer in non-agriculture sector. The higher wage of he Kraal laborers in the agriculture sector is due to the shortage Of labor supply for the agricultural activities. However, if there is significant migration to Kraal state from other states (in this case Briar), then it will increase supply of labor in the state, resulting in subsequent decrease in wage rates of Kraal laborers in the agricultural sector.

Hence in the presence of migrant laborers, the wage rate obtained by them ‘y’ in agricultural sector will be higher than that of migrated Briar laborers, it will be lower than 320. Hence 320 > y > x. Since shortage of labor supply is pre-dominant only n the agriculture sector, unlike non-agricultural sector where demand and supply is balanced, migration of Briar laborers will not affect wage rates of Kraal Laborers in non-agricultural sector much, earning same payoff as in absence of migration I. E. 292.

It can be observed from the payoff matrix that for Briar laborer migration is dominant strategy, earning higher payoff (x > 91 & z > 144). Hence it is better for Briar laborers to migrate to other states earning better wages than that of home state. While for Kraal laborer depending upon extent of migration and its effect on wage rate cross Kraal two conditions will emerge: If y > 292, then in this case staying in Agricultural occupation will be dominant strategy for Kraal laborers irrespective of presence or absence of migration from Briar laborers.