Long-term union-firm contracts

We explore the possibility for self-enforcing long-term contracts between a risk averse union and a risk neutral firm, when these have the option to strike an efficient bargian at every stage, and the state of the world is variable. It is shown that any long-term efficient wage agreement satisfying individual rationality constraints involves a more even income stream to the workers (except for the case when the discount rate is high) and can be implemented by a Subgame-perfect equilibrium (by the threat of returning to short-term bargaining). Moreover, any such constrained efficient agreement can be supported by the threat of triggering agreements which themselves are constrained efficient, i.e., it can be implemented by a Renegotiation-proof equilibrium.This paper is a revised version of Strand (1988) and is part of the research project Wage Formation and Unemployment at the SAF Center for Applied Research at the Department of Economics, University of Oslo. We would like to thank seminar participants at Cambridge University for pointing out an error of an earlier version. Thanks also to Terje Lensberg, Kjell Erik Lommerud, Lars Thorlund-Petersen, and two referees, as well as seminar participants at the 1989 EEA Conference in Augsburg and at the Universities of British Columbia, Haifa, and Maryland for helpful comments.