A GAME-THEORETIC APPROACH TO SUBSIDIZING EMPLOYMENT

This paper presents a simple game theoretic approach to the Government's decision to subsidize in order to safeguard employment. Central to the analysis is the notion that a government's commitment to subsidize will affect worker wage setting behaviour, and encourage rent seeking. A number of variants of the basic game are developed. Rules are adduced to predict government and worker behaviour, and some numerical simulation is performed on stylized data. A key result is that whilst in many of the one-shot games the worker can force subsidization, when repeated games are analysed, these generally favour the Government taking a tougher stance.