WAGE BARGAINING AND NOMINAL RIGIDITIES

Delays in wage negotiations do not necessarily mean work stoppage. Production can continue under the terms of the old contract while the parties are bargaining (holdout). This holdout option is included in a strategic bargaining game in addition to strike and lock-out threats. Integrating the bargaining model in a standard macroeconomic framework, it turns out that holdout threats will prevail under certain circumstances. In this case wages will be rigid in nominal terms, so that an increase in aggregate nominal demand increases aggregate output.