See slide for iso profit curves shaded area is the

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Unformatted text preview: better off. See slide for iso-profit curves, shaded area is the contract zone. The line represents all the efficient contracts—a contract curve. Point chosen on the contract curve will depend upon relative bargaining power of the two parties. A key weakness of this model: it calls for the two parties to negotiate both the wage and the level of employment. But hardly any contracts specify employment levels. This comes under the employer’s “right to manage. 4. Median voter model If layoffs are in inverse order of seniority, then different workers will have different preference regarding (w, N) combinations. They have different probabilities of being the ones who lose their jobs. [Unlike worksharing practices in Europe.] Median voter model builds upon this key point: See slide. 2 Heterogeneous preferences mean that the efficient contracts solution will result in gains for some workers—higher wages—but big losses...
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