Should delegation contracts be made before or after union wage setting? Endogenous moves in a managerial-unionized duopoly
This paper analyzes a multiple-stage game in which, at the final stage, two (managerial) firms compete over quantities in the product market. Prior to this stage, firm-specific unions set the workers' wages, while the owners of both firms hire managers and provide them with incentive contracts in order to affect their output decisions. Owners can freely decide to arrange the managerial contract before or after the (non-managerial) wage determination stage. Hence, the endogenous choice of the incentive contract stage is derived. The possibility of multiple (sub-game perfect) equilibria arises, where both owners choose managerial contracts before or after unions' wage setting, crucially depending on unions' preferences. In particular, owners may prefer, quite counter-intuitively, to choose the managerial contract after union wage setting when unions are neither extremely oriented towards employment, nor sufficiently oriented towards wages.
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