Profit-sharing in a unionized cournot duopoly

The main purpose of this paper is to analyze when it is optimal for firms in a unionized duopoly to introduce profit-sharing. It is shown that a firm only prefers a profit-sharing system if its own union does not have “too much” bargaining power, and if the union in the other firm does not have “too much” bargaining power. However, if a firm introduces profit-sharing, the employment increases, and the price in the goods market decreases. Hence, even if it is not in the own interest of a firm to introduce profit-sharing, it may be in the interest of the society.     

The one constant: a causal effect of collective bargaining on employment growth? Evidence from German linked‐employer‐employee data

A large number of articles have analysed ‘the one constant’ in the economic effects of trade unions, namely that collective bargaining reduces employment growth by 2–4% points per year. Evidence is, however, mostly related to Anglo‐Saxon countries. We investigate whether a different institutional setting might lead to a different outcome, making the constant a variable entity. Using linked‐employer‐employee data for Germany, we find a negative correlation between being covered by a sector‐wide bargaining agreement or firm‐level contract and employment growth of about 1% point per annum. However, the correlation between employment growth and collective bargaining is not robust to the use of panel methods. We conclude that the results of the literature using cross‐section data might be driven by selection.     

Private information,Coasian bargaining,and the second welfare theorem

Most of the debate about Coasian bargaining in the presence of externalities relates to the First Welfare Theorem: is the outcome under bargaining efficient? This debate has involved the definition and importance of transaction costs, the significance of private information, and the effect of entry. There has been little analysis of how Coasian bargaining relates to the Second Welfare Theorem: even if the bargaining outcome is efficient, does the process limit the set of Pareto optimal allocations which can be achieved?We consider a model in which individuals utilize a common resource and may affect each other's output. The individuals differ in their productivities or tastes and this information is private to each of them. The government can manage the common resource and use nonlinear taxes to correct for the externality or it can turn the common resource over to a private owner who can charge individuals to utilize it with a nonlinear fee schedule. The government and the owner have the same information about tastes and productivities of the individuals. Except for the private information, there are no bargaining or administrative costs for collecting the taxes or fees. Whether there is public or private ownership, the government desires to redistribute, but it faces self-selection constraints.We show that the outcome of Coasian bargaining is constrained Pareto efficient. That is, given the information constraints, no Pareto improvement is possible. However, private ownership may limit what Pareto optimal allocations the government can achieve. The private owner in seeking to maximize profits always proposes contracts which counteract the government's attempts to redistribute across individuals with different characteristics. Under public management, any Pareto optimum can be sustained. In this context, private ownership, while not inefficient, does limit the government's ability to redistribute.     

Union–firm bargaining: Order of play and efficiency

This paper shows that a modified alternating offers Rubinstein model can provide a Pareto superior outcome in the context of the right-to-manage union–firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the parties engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game. The equilibrium wage is, therefore, unique. In the second example, we examine a two-part-tariff alternating offers bargaining protocol, where the parties bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, socially optimal.     

Entry Threats and Inefficiency in ‘Efficient Bargaining’

We study limit pricing in a model of entry with asymmetric information, where the incumbent firm's wage is endogenously determined through ‘efficient bargaining’ with its union. In the presence of entry threat, the incumbent firm‐union pair may face a conflict between rent sharing and transmitting its cost information. When the wage is not observable to outsiders and employment is the only signalling instrument, over‐employment features in all entry deterring contracts. When the wage is also observable, information transmission becomes easier. Most of the time, then, but not always, the efficient contract deters (induces) entry against the low (high) cost incumbent.     

Bargaining, search, and outside options

This paper studies a two-sided incomplete information bargaining model between a seller and a buyer. The buyer has an outside option, which is modeled as a sequential search process during which he can choose to return to bargaining at any time. Two cases are considered: In Regime I, both agents have symmetric information about the search parameters. We find that, in contrast to bargaining with complete information, the option to return to bargaining is not redundant in equilibrium. However, the no-delay result still holds. In Regime II, where agents have asymmetric information about the outside option, delay is possible. The solution characterizes the parameters for renegotiation and those for search with no return to the bargaining table.     

Employment Protection and Unemployment Benefits: On Technology Adoption and Job Creation in a Matching Model

We analyse the effects of different labour‐market policies (employment protection, unemployment benefits, and payroll taxes) on job creation and technology choices in a model where firms are matched with workers of different productivity and wages are determined by ex post bargaining. The model is characterized by two intertwined sources of inefficiency, namely a matching externality and a hold‐up externality associated with the bargaining strength of workers. The results depend on the relative importance of the two externalities and on worker risk aversion. “Flexicurity”, meaning low employment protection and generous unemployment insurance, can be optimal if workers are sufficiently risk‐averse and the hold‐up problem is relatively important.     

Optimal mechanism design with resale via bargaining

In this paper, we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer, where inter-buyer resale cannot be prohibited. The resale market is modeled as a stochastic ultimatum bargaining game between the two buyers. We fully characterize an optimal mechanism under general conditions. Surprisingly, in this optimal mechanism, the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market. The seller sells only to the publicly known buyer, and reveals no additional information to the resale market. The possibility of resale causes the seller to sometimes hold back the object, which under our setup is never optimal if resale is prohibited. We find that the seller?s revenue is increasing in the publicly known buyer?s bargaining power in the resale market. When the publicly known buyer has full bargaining power, Myerson?s optimal revenue is achieved; when the publicly known buyer has no bargaining power, a conditionally efficient mechanism prevails.     

Profit sharing as entry deterrence mechanism

In a right-to-manage framework, this paper analyzes the optimal choice of the pay scheme (profit sharing vs. fixed wage) in a unionized duopoly with potential market entry and decentralized bargaining. The paper shows that, depending on the institutional features, both pay systems can arise as equilibria in Nash strategies. Under duopoly with committed bargaining, the fixed wage is the Nash equilibrium; with flexible bargaining, an agreement between the incumbent firm and its union about profit sharing arises as Nash equilibrium, if the union is not too strong. A monopoly with threat of entry reinforces the selection of profit sharing as a deterrent mechanism.     

Industry-Level Wage Bargaining: A Partial Rehabilitation—The German Experience

In order to reduce unemployment, it is often recommended that industry-level wage bargaining in Germany should be replaced by a more decentralized system. This paper provides a critical assessment of the current wage bargaining institutions and re-examines the case for a more decentralized system. Based on a theoretical model integrating Insider–Outsider aspects into the comparison, the uniformly superior employment performance of a decentralized wage bargaining system is questioned. We conclude that, rather than solely trying to decentralize wage bargaining, a promising policy option may be to improve the skills of the unemployed by efficient labour market policies and to foster institutional reforms such that wage bargaining takes account of the long-run employment consequences of wage setting.     

Demand and supply effects of bargaining power shocks

In times of crisis, social partners may consider a temporary decline in wages as a necessity to maintain employment. This paper studies the opposing demand and supply effects following declining bargaining power of workers in a New-Keynesian model with search and matching in the labour market. Lower labour income reduces aggregate demand in the presence of credit-constrained consumers. The main result is that falling bargaining power contracts output notably when monetary policy is constrained by the zero lower bound or when agents' expectations about the persistence of the shock adjust slowly.     

Wage bargaining, labor-tax progression, and welfare

This paper analyzes the effect of labor-tax progression on employment and welfare in an economy with a unionized labor market. The government influences wage bargaining through its tax policies. Wages can be reduced by increasing the marginal labor-tax rate. If there are no restrictions on profit taxation, a first-best optimum with full employment is realized; this first-best optimum can always be implemented by a progressive tax schedule. If profit taxation is restricted, unemployment may arise. For this case, we show that the welfare-maximizing degree of tax progression is influenced by a variety of factors, in particular the wage elasticity of labor demand, the distribution of bargaining power, and the existence of unemployment benefits. Examples are given for both progressive and regressive tax structures. Comparative-static analysis reveals that a decline in union bargaining power, an increase in unemployment benefits, and an increase in the overall work force reduce the efficient degree of tax progression.     

Communication in bargaining over decision rights

This paper develops a model of bargaining over decision rights between an uninformed principal and an informed but self-interested agent. We introduce two different bargaining mechanisms: tacit and explicit bargaining. In tacit bargaining, an uninformed principal makes a take-it-or-leave-it price offer to the agent, who then decides whether to accept or reject the offer. In the equilibrium of the game, the principal inefficiently screens out some agent types so that the agent's private information cannot be fully utilized when the decision is made. In explicit bargaining in which parties can communicate explicitly via cheap talk before tacit bargaining, however, an equilibrium with no such inefficient screening exists even when the conflict of interest is arbitrarily large. We also follow a mechanism design approach, showing that under certain conditions, explicit bargaining is an optimal bargaining mechanism that maximizes the joint surplus of the parties.     

Wage Indexation, Employment and Inflation

Price versus productivity-indexing is considered in a model of monetary policy with incomplete information and wage bargaining. In a perfectly price-indexed economy, the inflationary bias due to lack of credibility is eliminated. However, productivity-indexing is more appropriate to dampen macroeconomic fluctuations that are caused by real disturbances. We show that productivity-indexing alone guarantees both price and employment stability, provided the government's reputation is good enough and the union's bargaining power is not too strong. This reduces the degree of price indexation as the union becomes weaker and the government's reputation improves. Productivity-indexing is desirable with volatile productivity processes and weak unions.
JEL classification : E 24; E 52     

The labor market effects of trade union heterogeneity

Empirical evidence suggests that the bargaining power of trade unions differs across firms and sectors. Standard models of unionization ignore this pattern by assuming a uniform bargaining strength. In this paper, we incorporate union heterogeneity into a Melitz (2003) type model. Union bargaining power is assumed to be firm-specific and varies with firm productivity. This framework allows us to re-analyze the labor market effects of (i) a symmetric increase in the bargaining power of all unions and (ii) trade liberalization. We show that union heterogeneity unambiguously reduces the negative employment effects of stronger unions. Firm-specific bargaining power creates a link between unionization and the entry and exit of firms, implying a reduction of the unions' expected bargaining power. Moreover, union heterogeneity constitutes an (un)employment effect of trade liberalization. If unions are most powerful in the high-productivity (low-productivity) firms, trade liberalization will increase (decrease) unemployment.     

Employment and hours of work

This paper develops a dynamic model of the labor market in which the degree of substitution between employment and hours of work is determined as part of a search equilibrium. Each firm chooses its demand for working hours and number of vacancies, and the earnings profile is determined by Nash bargaining. The earnings profile is generally nonlinear in hours of work, and defines the trade-off between employment and hours of work. Concave production technology induces firms to overemploy and, as a result, hours of work are below their optimal level. The Hosios condition is not sufficient for efficiency. When there are two industries, workers employed by firms with higher recruitment costs work longer and earn more. That is, “good jobs” require longer hours of work. Interestingly, technology differentials cannot account for working hours differentials.     

An Asymmetric Information Model of Lockouts

This note proposes an asymmetric information model of collective bargaining where the firm has the bargaining power and the union the private information. Results show that the firm may use lockouts to induce the union to reveal its private information.     

WAGE AND EMPLOYMENT DETERMINATION THROUGH NON-COOPERATIVE BARGAINING

This paper investigates wage and employment determination by a group of workers or union and a firm, making use of the techniques of non-cooperative bargaining. Previous analyses have examined wage determination with an artificial restriction that employment is determined either before or after wage determination has occurred. Here, employment determination is made part of the bargaining process. With two variables being determined, there is bargaining with a variable pie and solutions correspond to equilibria without commitment. Two different notions of efficiency – exchange and pie efficiency – are relevant and serve to characterise equilibria. Multiple equilibria are shown to arise naturally once exchange inefficient proposals are possible. In all equilibria there is overemployment. Factors that restrict a firm's ability to alter the labour force during or after the wage-bargaining process are shown, paradoxically, to benefit the firm.     

Coalitional bargaining games with random proposers: Theory and application

We consider a non-cooperative coalitional bargaining game with random proposers in a general situation for which players differ in recognition probability and time preference. We characterize an efficient equilibrium as the generalized Nash bargaining solution that belongs to the core. The model is applied to wage bargaining between an employer and multiple workers. Although involuntary unemployment may occur in equilibrium, full employment emerges as players become sufficiently patient.     

Flexible and Committed Profit Sharing with Wage Bargaining: Implications for Equilibrium Unemployment

We analyze the relationship between profit sharing, employee effort, wage formation and unemployment under different relative timings of the wage and profit sharing decisions. The optimal profit share under commitment exceeds that under flexibility, because through a profit share commitment the firm can induce wage moderation. The negotiated profit sharing depends positively on the bargaining power of trade union and it has both effort-enhancing and wage-moderating effects. Higher profit sharing is shown to reduce equilibrium unemployment under ``sufficiently rigid' labor market institutions, but it can harm employment when labor market ``rigidities' are ``small enough'.