Question

The below figure represents the potential outcomesof your first salary negotiation after graduation.Assuming this is a sequential-move game withthe employer moving first, indicate the most likelyoutcome. Does the ability to move first give theemployer an advantage? If so, how? As theemployee, is there anything you could do to real-ize a higher payoff?

Answer 1

Answer:

Step-by-step solution

1. Step 1 of 8

   A sequential game is a game in which one player chooses an action before the other chooses his in the full light of information about the actions played at that point. The later player has full information about the former player and he first observes his move and then plays the best possible actions.

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2. Step 2 of 8

   To find the equilibrium strategy of the players, we use the method of backward induction which is defined as the backward deduction of strategies from the end point of the game and considering the optimal action to be the end point to deduce for the next step backward.

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3. Step 3 of 8

   In the given question, the sequential game and the payoffs are as follows:

   

   Employee Employee Employee (0,0) (100, 75) (0,0) (75, 100)

   Here L represents the employer offering low salary and the H represents the employer offering high salary. R represents the employee rejecting the offer and A represents the employee accepting the offer.

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4. Step 4 of 8

   Going by the definition of backward induction and considering the following sub game:

   

   Employee (0,0) (75, 100)

   Here the employee will play A rather than R because he gets a payoff of 100 while playing A and a payoff of 0 while playing R. Hence sub game perfect equilibrium is playing A for the employee.

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5. Step 5 of 8

   Now considering the other sub game,

   

   Employee (0,0) (100, 75)

   Here the employee will play A rather than R because he gets a payoff of 75 while playing A and a payoff of 0 while playing R. Hence sub game perfect equilibrium is playing A for the employee.

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6. Step 6 of 8

   Now, continuing with the definition of backward induction, the effective game now becomes:

   

   Employee (100, 75) (75, 100)

   Here, the employer will play L rather than H because he gets a payoff of 100 while playing L and a payoff of 75 while playing H. Hence, sub game perfect equilibrium is playing L for the employer.

   Hence, the equilibrium strategy is to play L for the employer and to play A for the employee that is, Employer offers low package and the employee accepts the same.

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7. Step 7 of 8

   Yes, this ability to play first gives employer an advantage as on offering lower package still makes the employee to accept the offer where the employee was well informed the move of the employer. The employer restricted the employee at the payoff of 75 while he himself got a payoff of 100; hence he was in profit in playing this game.

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8. Step 8 of 8

   To get this to play via backward induction, the employee needed to reject the low salary offered by the employer i.e. the employee always rejects the low salary offer, then it would have got the high salary package accepted and it would increase the payoff.

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