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A Dynamic Model of Bargaining in a Unionized Firm with Irreversible Investment

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  • Curtis J. Eberwein
  • Tryphon Kollintzas

Abstract

This paper develops a dynamic model of bargaining between a firm and union. Capital is assumed to be firm-specific, so only nonnegative investments are possible. Collective bargaining contracts specify the level of the wage rate that will prevail for a fixed contract length, while the firm unilaterally chooses employment. Two types of equilibria are considered. In one equilibrium, the wage-employment outcomes lie on the marginal revenue product of labor curve and the wage is determined by a generalized Nash bargain. This equilibrium is Pareto inefficient. In another equilibrium, wage-employment pairs lie on the contract curve and wages are set above the marginal product of labor. In this equilibrium, the firm's desire to reduce employment strategies in which the union bargains tougher in the future and the Pareto inefficient equilibrium prevails. Existence results are established and the equilibria are characrerized for a particular specification of the firm's revenue function and the union's temporal utility function, using recursive methods. The model is calibrated on stylized facts from the U.S. economy. It turns out that the calibrated model can account for several other stylized facts; in particular, the relatively low variability of the wage rate and the countercyclicality of the union wage premium. Moreover, it is found that irreversibilities are crucial in this respect, in the ergodic as well as the nonergodic states.

Suggested Citation

  • Curtis J. Eberwein & Tryphon Kollintzas, 1995. "A Dynamic Model of Bargaining in a Unionized Firm with Irreversible Investment," Annals of Economics and Statistics, GENES, issue 37-38, pages 91-115.
  • Handle: RePEc:adr:anecst:y:1995:i:37-38:p:91-115
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    Cited by:

    1. Vlassis, Minas & Petrakis, Emmanuel, 1996. "Endogenous scope of bargaining in oligopoly," UC3M Working papers. Economics 3978, Universidad Carlos III de Madrid. Departamento de Economía.
    2. Minas Vlassis, 2003. "Wage Centralization and the Scope of Firm–Union Bargaining: ‘Efficient Bargains’ or ‘Labour Demand’?," Manchester School, University of Manchester, vol. 71(3), pages 308-329, June.

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