The strategic interaction between Angela and Bruno in Case 2 is comparable to an ultimatum game. In this analogy, Bruno fills the role of the Proposer, as he is the one to make a single, non-negotiable offer. Angela acts as the Responder, possessing the power to either accept the proposed contract or reject it, in which case the deal does not proceed.

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In the scenario referred to as Case 2, institutional changes through new labor laws and policies, enforced by a government, protect Angela from forced labor. These new rules increase Angela's structural power by giving her a higher reservation option, as she now has the legal right to refuse Bruno's 'take-it-or-leave-it' contract offers. This shift in the 'rules of the game' leads to an improved outcome for Angela with increased utility and income, while simultaneously decreasing Bruno's income compared to the coercive arrangement in Case 1. The dynamic is analogous to an ultimatum game.

Improved Rights and Structural Power for Angela under New Legislation (Case 2)

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CORE Econ - The Economy 2.0: Microeconomics

An individual's reservation position, or fallback option, is a critical determinant of bargaining outcomes. When a person's rights and alternatives are enhanced, for example through new legislation, their reservation position improves, which can be represented by a higher reservation indifference curve (like IC2 for Angela). This improved bargaining power acts as a direct constraint on negotiations: any contract offer that provides the individual with less utility than their reservation option will be rejected. This mechanism compels the other party to propose a more favorable contract that meets this new minimum utility threshold.

Improved Reservation Position Leads to Better Contract Offers

In the Angela-Bruno model under the rules of Case 2, Bruno can propose two kinds of 'take-it-or-leave-it' contracts: employment or tenancy. This structure means Angela cannot negotiate the terms and must either accept or reject them as offered. For an employment contract specifically, Bruno dictates the hours of work and the wage (paid in grain) that Angela will receive.

Contract Types in the Angela-Bruno Model (Take-it-or-Leave-it Offers)

Angela-Bruno Interaction (Case 2) and the Ultimatum Game

A contract is a written or spoken agreement that is intended to be legally enforceable, which distinguishes it from an informal promise. Contracts are fundamental to the economy; their existence and the ability of institutions to enforce them are major factors in economic prosperity.

Contract

In Case 2 of the Angela-Bruno model, Angela's reservation option is defined by the outcome she receives if she rejects Bruno's contract offer. Her alternative in this scenario is to leave Bruno's land and find other work. The utility she would gain from this alternative employment establishes the value of her reservation option.

Angela's Reservation Option in Case 2

In Case 2 of the Angela-Bruno model, Bruno's primary decision involves setting Angela's work hours and the wage she will receive. While the variables he chooses are similar to Case 1, his decision is now fundamentally constrained by Angela's improved reservation option. He must offer a contract that grants Angela a utility level at least as high as her reservation indifference curve (IC2), as she will refuse any offer that falls short of this minimum.

Bruno's Decision-Making in Case 2

Due to her increased structural power in Case 2, Angela secures a better outcome than in Case 1. Although her work hours might be the same, her income from the take-it-or-leave-it contract is higher than she would have received under the coercive conditions of Case 1, making her better off. This improvement is a direct result of her improved outside options and legal protections.

Angela's Outcome in Case 2 vs. Case 1

Bruno's rent in Case 2 is lower compared to what he would receive in Case 1. This difference arises because Case 1 operates under rules that allow Bruno to use force, whereas the rules in Case 2, which grant Angela more power, lead to a different distribution of the surplus.

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