Policy modeling in four agent economy

Abstract

This paper proposes a simple model of policy game played by four main agents of economy: profit maximizing firms active on competitive market, monopolistic trade union (aggregated wage setters), government and central bank. The interactions between agents are described by the single period aggregate demand and supply equations. We also adopt assumption of bounded rationality of agents. After reduction of firms as active agent, the resulting three agents decision system is modeled as Stackelberg game with central bank as leader and trade union and government as composite follower, aggregated by means of Nash bargaining solution. The simulation of policy game is provided. © Springer-Verlag 2004.