Suppose that prior to negotiation with a firm, a worker chooses whether to invest (I) or to not invest (N). Investing entails a personal cost of 10 to the worker. Not investing entails a cost of zero. The manager of the firm observes the worker's investment choice and then negotiates with the worker on whether to hire him and, if so, at what salary. Assume that the outcome of their negotiation is given by the standard bargaining solution with equal bargaining weights.
The benefit to the firm of hiring the worker depends on whether the worker has made the investment. Investment yields a benefit of 30 to the firm. Noninvestment yields a benefit of 16 to the firm. The firm's payoff is the benefit it receives less the salary it pays the worker. The worker's payoff is the salary received less the investment cost. If the worker is not hired, then the firm's payoff is zero and the worker's payoff is zero less the cost of investment.
(a) In a negotiation equilibrium, what is the worker's investment decision and what is the outcome of the negotiation? Explain.
(b) Is the outcome you found in part (a) efficient? Explain why or why not.