What Is a Contract Curve?

Efficiency contracts are those points where the equal profit curve of the employer is tangent to the indifference curve of the union. At these points, the increase in the welfare of either party will not damage the welfare of the other party, that is, there is any possibility of Pareto improvement. By connecting all possible tangent points, it is possible to get the curve ed, which is usually called the efficiency contract curve (or efficiency contract trajectory). Each point on this curve represents a cut-off point for the indifference curve of the union and the equal profit curve of the employer. At these points, the welfare of both parties to the labor relationship, that is, the effectiveness of the union and the profit of the employer, is at least the same as point b, and at least one of them has better benefits than point b. Further, any change, that is, deviation from the efficiency contract curve, will impair the welfare of one party. However, at all decision points on the ed line, the two parties are not indifferent. The union's preference is close to point d, and the employer's preference is close to point e. Whether the actual collective bargaining structure is determined on which point of the contract curve depends mainly on the size of the bargaining power of the two parties.

Efficiency contract curve

Right!

Efficiency contracts are those points where the equal profit curve of the employer is tangent to the indifference curve of the union. At these points, the increase in the welfare of either party will not damage the welfare of the other party, that is, there is any possibility of Pareto improvement. By connecting all possible tangent points, it is possible to get the curve ed, which is usually called the efficiency contract curve (or efficiency contract trajectory). Each point on this curve represents a cut-off point for the indifference curve of the union and the equal profit curve of the employer. At these points, the welfare of both parties to the labor relationship, that is, the effectiveness of the union and the profit of the employer, is at least the same as point b, and at least one of them has better benefits than point b. Further, any change, that is, deviation from the efficiency contract curve, will impair the welfare of one party. However, at all decision points on the ed line, the two parties are not indifferent. The union's preference is close to point d, and the employer's preference is close to point e. Whether the actual collective bargaining structure is determined on which point of the contract curve depends mainly on the size of the bargaining power of the two parties.