Abstract
We explicitly model the vertical spillovers that result from imperfections in both labour and product markets. We model the vertical spillovers from wage determination in an upstream labour market to market share performance in a downstream product market and vice versa. Rent sharing due to efficiency wages is shown to create a unique downstream vertical spillover while rent sharing due to wage bargaining creates a two-way vertical spillover. Using U.K. firm level panel data, we show that downstream spillovers due to efficiency wage payments and union activity exist, and constitute general direct evidence of efficiency wage payments in U.K. companies.
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