Occasionally, you may find yourself writing a script or paper to explain a concept using mathematical models. Personally, I don’t follow a strict process, but I strive to be as systematic as possible. In hindsight, when reviewing research, you might uncover a previous article that contains a significant and unexpected correlation to what you’ve just written.
This is exactly what happened to me with my first arXiv preprint. According to OpenAI's new paid Deep Research feature, I built upon a widely popularized model based on one of the early articles by former IMF Chief Economist Olivier Blanchard. To be clear, my preprint focuses on oligopolistic pricing and the regulation of signaling by competition authorities during economic downturns.
Blanchard has been an influential figure for some time, not because he always represents the voice of reason, but because his views often challenge the prevailing consensus in contemporary thought. One particular article of his resonated with me deeply, such that I have seemingly inadvertently reiterated the key points from his 1987 paper with Kiyotaki. Specifically, his use of Ackerlof and Yellen's (1985) efficiency wages and the menu cost model. The similarities are striking.
There is sometimes unwarranted hype around menu costs, which refer to the costs associated with altering the price of a firm’s products. These costs are closely related to the concept of 'sticky' wages. Blanchard supports this view, acknowledging that there are macroeconomic effects associated with switching costs. I argue a similar point from the perspective of the switching costs related to wage changes. I introduce the switching cost as a variable, R(t), which forms a residual term and encapsulates this aspect of Blanchard and Kiyotaki’s framework within the bargaining process.
References
Blanchard, O.J., & Kiyotaki, N. (1987) 'Monopolistic Competition and the Effects of Aggregate Demand', American Economic Review, 77(4), pp. 647-666.
Mayaki, A. A. B. (2024) 'Pareto-Nash Reversion Strategies: Three Period Dynamic Co-operative Signalling with Sticky Efficiency Wages', arXiv pre-print, pp. 1-12
Comments
Sticky Wages as a Structural Constraint, Not a Friction
Reading back through older posts for inspiration, this one is doing systems thinking in the language of labour economics. The distinction is not cosmetic. Menu costs and switching costs are usually framed as frictions. Deviations from a frictionless equilibrium. On that reading, the model is correct and the costs are noise to be minimised or abstracted away. The alternative reading is that they are structural features of the system. Not deviations from a norm, but the norm itself. A wage that cannot adjust is not a wage that has failed to adjust. It is a wage embedded in a set of relationships that make adjustment costly to the participants. That distinction changes what R(t) is doing. Treated as a residual, it captures what the model cannot explain. Treated as a structural variable, it is the thing that determines whether the system converges, oscillates, or locks in. Path dependence enters here. Each period's switching cost is conditioned by the previous period's outcome. The system has memory. Blanchard and Kiyotaki were modelling aggregate demand effects under monopolistic competition. The extension into efficiency wages and reversion strategies shifts the question from "what does the equilibrium look like" to "what does the system do over time." That is a different discipline. Both are legitimate. They are not the same. Regards,
Russell Larke
BA (Hons) Business Management | MSc Candidate (Systems Thinking)
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