Bargaining Power and Equilibrium Consumption



For convenient reference, we state an obvious auxiliary result before proceeding to
the proof of Fact 2.

Lemma 1 Let real numbers σ, τ, z > 0 be given. The solution of the problem

max z1σ z2τ s.t. z1 0, z2 0, z1 + z2 = z

is z 1 = σ ∙ z, z = = -L- ∙ z, with value

1 σ+τ     2 σ+τ

μ ⅛ )σ μ . ) τ+τ.

Proof of Fact 2

Let x = x1 + x2 and y = y1 + y2 denote the total amounts purchased by household
h. By Lemma 1, maximization of the Nash product u1αu1-α requires

x1 =

--------∙ x,
σ
+ τ

τ
_____________ , ιγ

x2=

^x,
σ
+ τ

σ*

y1 =

σ* + τ* ^ y,
τ
*

y2=

σ* + τ* ^ y

where

= αγ1,
τ
= (1 - α)γ2,

σ* = α(1 - γ 1),
τ
* = (1 - α)(1 - γ2).

Moreover, at the maximum,

_                     _ _*                         _*

uαu1 -α = (σγ ɪ Y       σ (_IL_ γ y

1 2      σ + τ σ + τ σ * + τ*     σ * + τ*

with

δ = σ +τ = αγ1 +(1 - α)γ2 = γ2 + α(γ1 - γ2);

1 - δ = σ * +τ* = α(1 - γ1) + (1 - α)(1 - γ2) = 1 - γ2 - α(γ1 - γ2).

28



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