Endogenous Contracts in Unionized Oligopoly

Abstract:     
We study the endogenous determination of contracts in a unionized oligopoly and the welfare implications thereof. Alternative contracts specify the sequencing in the selection of R&D and wages. They can be classified as ‘fixed’ when the unions set wages before the firms make their R&D decisions or ‘floating’ when the sequencing of these choices is reversed. If the unions are highly employment-oriented, we find that either all firm–union pairs choose floating-wage contracts or both contract types may coexist depending on the degree of technological spillovers. However, when the unions have stronger preference over attaining a good wage deal, then it becomes very likely that fixed-wage contracts will endogenously emerge because they can serve as an insurance device against oppor tunistic wage increases. Our welfare analysis suggests that welfare-improving contracts may nevertheless not always arise in equilibrium.

Number of Pages in PDF File: 27

Accepted Paper Series