Nash equilibrium in evolutionary competitive models of firms and workers under external regulation

Abstract

The object of this paper is to study the labor market using evolutionary game theory as a framework. The entities of this competitive model are firms and workers, with and without external regulation. Firms can either innovate or not, while workers can either be skilled or not. Under the most simple model, called normal model, the economy rests in a poverty trap, where workers are not skilled and firms are not innovative. This Nash equilibria is stable even when both entities follow the optimum strategy in an on-off fashion. This fact suggests the need of an external agent that promotes the economy in order not to follow in a poverty trap. Therefore, an evolutionary competitive model is introduced, where an external regulator provides loans to encourage workers to be skilled and innovative firms. This model includes poverty traps but another Nash equilibria, where firms and workers are jointly innovative and skilled. The external regulator, in a three-phase process (loans, taxes and inactivity) achieves a common wealth, with a prosperous economy, with innovative firms and skilled workers.