Goal
The proposed experiment makes numerous additions to the field. It is the first experiment to analyse the effects of politically-induced inflation uncertainty and central bank independence on wage negotiations and outcomes. It will also contribute to the empirical literature on wage bargaining by considering a framework other than unionised wage bargaining. This study also proposes an extension to the traditional bargaining problem considered previously in the experimental literature by considering the case in which both players face uncertainty about the size of the object.

Background
The purpose of this investigation is to analyse in an experimental setting the effect of politically-induced inflation uncertainty on wage bargaining, and the effect of reducing this uncertainty by granting political independence to the central bank. Two players, one supplier and one firm, will bargain over price increases both when inflation is uncertain and when it is known. The uncertainty is caused by upcoming elections (first round) or by the possibility that the central government will take over the bank and change inflation rates (second round). Players will also be asked to predict the inflation rate in the first round.

In all proposed treatments, subjects will engage in a sequential bargaining game with five rounds of negotiation. In these, a "supplier" must negotiate a percentage "price" increase with a "firm" in each round. If the inflation rate is set within a partisan framework, wage negotiations occur before elections, implying that the inflation rate is not known.

Research Questions
The project tackles four non-mutually exclusive fundamental issues separately: What is the role of inflation expectations in wage bargaining?

How does politically-induced inflation uncertainty affect the outcomes of wage bargaining?

How will the introduction of an Independent Central Bank affect wage bargaining if: The impact of the ICB is to merely reduce the variance of inflation relative to the partisan regime?

The ICB's introduction also reduces the average rate of inflation vis-à-vis the partisan regime?

What is the impact on wage bargaining if there is a possibility that the government can renege on the contract establishing an independent central bank?

Last Updated: June 1, 2006