Efficient Bargaining Research Articles

Labor share in transition economies: brief firm-level investigation

ABSTRACT In this paper, we examine the role of the globalization factors for the labour share in transition economies. We rely on firm-level data from the Enterprise Surveys of the World Bank and EBRD. We base the analysis on the predictions of the classic trade and efficient bargaining models, which under globalization suggests that factors that work to increase or attenuate the bargaining power of workers, affect the share of income that goes in their hands. We find some role of globalization for labour share in transition economies. Labour productivity and the fixed cost of the capital to relocate contribute to increasing labour share, while the alternative returns of capital work in the opposite direction. Labour-related costs and alternative returns were found irrelevant. For transition economies, policies focused on labour productivity and on cooperation, instead of competition, in the policies to attract FDIs may improve the outcomes for workers and their incomes.

Incomplete Information Bargaining with Applications to Mergers, Investment, and Vertical Integration

We provide an incomplete information bargaining framework that captures the effects of differential bargaining power in markets with multiple buyers and multiple suppliers. The market is modeled as a mechanism that maximizes the expected weighted welfare of the firms, subject to the constraints of incentive compatibility, individual rationality, and no deficit. We show that, in this model, there is no basis for the presumption that vertical integration increases equally weighted social surplus, while it is possible that horizontal mergers that appropriately change bargaining weights increase social surplus. Moreover, efficient bargaining implies that in equilibrium noncontractible investments are efficient. (JEL C78, D82, D83, G34, K21, L22, L40)

Wage bargaining as an optimal control problem: a dynamic version of the efficient bargaining model

In this paper, I develop a dynamic version of the efficient bargaining model grounded on optimal control in which a firm and a union bargain over the wage in a continuous-time environment under the supervision of an infinitely lived mediator. Overturning the findings achieved by means of a companion right-to-manage framework, I demonstrate that when employment is assumed to adjust itself with some attrition in the direction of the contract curve implied by the preferences of the two bargainers, increases in the bargaining power of the firm (union) accelerate (delay) the speed of convergence towards the stationary solution. In addition, confirming the reversal of the results obtained when employment moves over time towards the firm’s labour demand, I show that the dynamic negotiation of wages tends to penalize unionized workers and favour the firm with respect to the bargaining outcomes retrieved with a similar static wage-setting model.

Trade unions and corporate social responsibility

AbstractTrade unions distort a profit‐maximizing firm's input choice. The nature of the resulting inefficiency depends on whether there are wage negotiations or there is efficient bargaining. Moreover, trade unions redistribute income and thereby affect welfare. If firms also pursue Corporate Social Responsibility (CSR) objectives, input choices may be distorted already in the absence of collective bargaining. Adopting a positive perspective, we show that CSR objectives, which induce a firm to expand production, have ambiguous wage and employment consequences in case of wage negotiations and raise employment if there is efficient bargaining. Importantly from a normative vantage point, such CSR objectives make a welfare‐enhancing role of trade unions more likely in the presence of wage negotiations. The reverse is true in case of efficient bargaining.

Property rights and resource use: evidence from MLB starting pitchers

ABSTRACT We conduct a unique test of the efficiency of property rights in major league baseball. The rights to the services of players are resources that can be possessed by the clubs or by the players themselves. This right was effectively reassigned from the club to the individual player when free agency was introduced in 1976. Players, however, only qualify for free agency after 6 years of service, and until that time a temporary property right is possessed by the club. In the absence of efficient bargaining, clubs that possess only a temporary right do not bear the full risk of injury or disability associated with using pitchers. Clubs in this situation can therefore have an incentive to overuse star pitchers. This theoretical prediction is supported by the statistical inferences of our econometric models.

Has globalization shrunk manufacturing labor share in transition economies?

The objective of this paper is to investigate the nexus between the labor share and globalization in transition economies, with a reference to the skill intensity. We put these developments in the context of the structural and reform developments in transition economies. We rely on the predictions of the efficient bargaining model, whereby globalization forces are set to affect workers’ market bargaining power, which then produces certain developments in the labor share. We use industry-level data for 23 transition economies of Central and Southeast Europe and the Commonwealth of Independent States over the late transition period of 2000–2015. Results robustly suggest that globalization forces played important role for the stagnant labor shares in transition economies, mainly in low-skill industries. Workers’ shares in high-skill industries largely remained intact. Results further suggest that the negative effect has been the strongest for the low-skilled workers in the early transition phase and then lessened or vanished as countries turned a higher development stage. The key finding advises that if governments of transition countries attempted to or undertook steps to seize globalization by offering ‘cheap labor’, then it has been the wrong strategy.

Union oligopoly and entry in the presence of homogeneous labor

Abstract. The analysis discusses the labor market equilibrium under union oligopoly, where unions represent homogeneous workers and use employment strategies. The following points are addressed: 1. The labor market outcomes in the presence of; a. uncooperative behavior among unions; b. uncooperative environment with a leading union; c. collusive (coordinated unions) behavior among unions; d. globally efficient bargaining, are confronted. A specific example with a Stone-Geary utility function and linear demand is forwarded. 2. Supply dynamics may push up employment and, therefore, the number of unions. In equilibrium, some bounds exist to the number of unions the market can support, which are investigated in the example. Five supply dynamics are considered: a. reservation wage restriction; b. a standard labor supply constraint; c. number of unions equal demand; d. individualistic unions; e. existence of a minimum (employed) membership requirement. The equilibrium number of unions for the Cournot-Nash, Stackelberg and efficient bargaining structures is derived for the case where unions exhibit Stone-Geary preferences and labor demand is linear. Keywords. Unions, Wage determination models, Union bargaining, Corporatism, Imperfect competition and union behavior. Union oligopoly. JEL. J51, E24, D49, C79.

Environmental effectiveness of tax compliance policy in the presence of labor unions

AbstractThis paper investigates the impact of a stricter tax compliance policy on firms’ pollution emissions in the presence of labor market frictions. In contrast to a situation with perfect labor markets, we find that under the right‐to‐manage wage formation, a stricter compliance policy increases emissions when the shadow cost of the emission limit is excluded, whereas it has no impact when the shadow cost is included. With efficient bargaining, a stricter compliance policy decreases (or increases) pollution emissions under employment (wage) orientation but has no impact on pollution emissions under wage neutrality.

Sindicatos y su entrada a las industrias tradicionales y de redes

The paper analyses the effects of unionisation of the labour market under the Right-to-Manage (RTM), and Sequential Efficient Bargaining (SEB) institutions, on the entry of a firm, then comparing traditional and network industries. The findings show that under RTM unions always play a pro-competitive role, while under EB they may become a barrier to entry – under the form of the payment of a fee to obtain a monopoly grant by an authority - in network industries with intense network effects. These results shed light on the importance of the presence, on the one hand, of unions and different bargaining agendas and on other hand of network goods on the shape of industrial competition, with the evident anti-trust and competition policies implications.

Bargaining Agenda in a Unionized Bilateral Monopoly

AbstractThe endogenous choice of the bargaining agenda between the two alternatives of Right‐to‐Manage (RTM, i.e., only wages are negotiated) and Efficient Bargaining (EB, i.e., both wages and employment are negotiated) is examined in a vertically integrated unionized bilateral monopoly with firm‐specific negotiations. Although the RTM agenda emerges as the unique subgame perfect equilibrium choice, a joint commitment to EB agendas leads both bilateral monopolists to gain higher profits, provided that the union bargaining power is adequately weak. This result is in sharp contrast to previous findings that the RTM typically secures higher profits to a single unionized monopolist.

Profits Under Centralized Negotiations: The Efficient Bargaining Case

AbstractMaking use of a Conjectural Variation model, the present note re-examines the subject of the firms’ profits ranking under different degrees of market competition in a unionized duopoly with industry-wide Efficient Bargaining (EB). It is shown that, while Cournot-like competition profits are always larger than Bertrand-like ones with separated wage negotiations, an uniform wage bargaining can lead to the appearance of the reversal.

Collective Bargaining in a Basic North American Sports League Model With Broadcasting Revenue

The general firm/trade union bargaining literature is brought to bear on a specific North American sports league model, where talent supply is perfectly inelastic and profit-maximizing clubs receive local (gate) revenue plus an equal share of league broadcasting revenue. Club and player representatives negotiate a collective bargaining agreement (CBA) on the levels of local revenue sharing, salary cap, and salary floor. Results characterize the set of efficient bargains and the Nash bargaining solution and show how they are affected by increases in broadcasting market size, focusing on player salaries, competitive balance, the content of CBA documents, and comparisons with laissez-faire.

Wage versus efficient bargaining in a Cournot duopoly: A Preliminary Note on Welfare

Wage versus efficient bargaining in a Cournot duopoly: A preliminary note on welfare In a unionized Cournot duopoly with decentralized, firm-level bargaining, this note re-examines the endogenous equilibrium agendas wage vs. efficient bargaining that can arise under three different specifications of the timing of negotiations and the impact of the outcome of the bargaining process on social welfare. Given that explicit conflict of interest among the bargaining parties can arise in every timing specification, this note proposes, analyzes, and discusses some guiding principles for governments and public authorities interested in pursuing social welfare improvements.

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

AbstractI analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.

Productivity and distribution effects of codetermination in an efficient bargaining model

Codetermination can be regarded as an extreme regulatory intervention of the legislator in the labor market which might affect the efficiency of production and the bargaining power of labor. Based on a model that covers both efficient bargaining and employment bargaining a simple equation is derived that is suited to empirical testing. The empirical test is based on German data and includes years before and after the extension of German codetermination law in 1976. The estimates determine the productivity of labor and relative bargaining power of capital and labor. It turns out that codetermination does not affect productivity, but leads to a significant increase in workers’ bargaining power and the distribution of rents. Results based on a second data source with more recent information support the conclusions of the difference-in-differences estimations.

THE BUSINESS CYCLE WITH NOMINAL CONTRACTS AND SEARCH FRICTIONS

Macroeconomic models of the economy with rigid wage structures tend to predict unrealistically volatile labor hours and countercyclical productivity. This study extends the Cho–Cooley model by incorporating labor market frictions and efficient bargaining as an alternative contracting scheme in which contracts are forward-looking and specify labor hours and wage rates. By accounting for search frictions and realistic contractual schemes, the extended model overcomes two counterfactual predictions: (1) excess volatility of employment and output and (2) countercyclical productivity. However, the extended model fails to produce the Beveridge curve.

Marginal Jobs and Job Surplus: A Test of the Efficiency of Separations

We present a sharp test for the efficiency of separations. First, we document a dramatic increase in the separation rate – 11.2ppt (28%) over five years – in response to a quasi-experimental extension of UI benefit duration for older workers. Second, after the abolition of the policy, the job survivors in the formerly treated group exhibit exactly the same separation behavior as the control group. Juxtaposed, these facts reject the Coasean prediction of efficient separations, whereby the UI extensions should have extracted marginal (low-surplus) jobs and thereby rendered the remaining (high-surplus) jobs more resilient after its abolition. Third, we show that a formal model of predicted efficient separations implies a piece-wise linear function of the actual control group separations beyond the missing mass of marginal matches. A structural estimation reveals point estimates of the share of efficient separations below 4%, with confidence intervals rejecting shares above 13%. Fourth, to characterize the marginal jobs in the data, we extend complier analysis to difference-in-difference settings such as ours. The UI-indiced separators stemmed from declining firms, blue-collar jobs, with a high share of sick older workers, and firms more likely to have works councils – while their wages were similar to program survivors. The evidence is consistent with a non-Coasean framework building on wage frictions preventing efficient bargaining, and with formal or informal institutional constraints on selective separations.

Do Unions Increase Labor Shares? Evidence from US Industry-Level Data

We explore the relationship between union membership rates and labor shares using panel data on 35 industries, spanning the entire US economy, for the years 1983–2005. For the full sample, a standard deviation increase in union membership rates is associated with an increase in an industry’s labor share of about 10%. Starting from the mean labor share in our sample (0.614), this effect amounts to about 6 percentage points. However, the effect is weaker and not statistically significant for manufacturing industries. We control for the capital-to-output ratio in all of our estimations, and the results are consistent with an elasticity of substitution between capital and labor that is less than unity. As such, the positive union effect on labor share is consistent with either the right-to-manage or the efficiency bargaining model of unions.

International trade and unionization: Evidence from India

AbstractWe exploit exogenous variation in tariffs to examine the impact of import competition on unionization and union wages in a developing country. Using a combination of nationally representative household data (National Sample Survey Organization) and nationally representative industry‐level data (Annual Survey of Industries) from India, we find that net‐import industries that experienced larger cuts in tariffs also experienced larger declines in unionization. In addition, we find that these industries also experienced larger increases in union wages. These results are consistent with the predictions of an efficient bargaining framework that we extend to endogenize the union formation decision by allowing for a fixed cost of union formation. We also conduct a back‐of‐the‐envelope calculation to show that the total wage gains to unionized workers marginally exceed the total wage losses to deunionized workers.

How Status Seeking may Prevent Coasean Bargaining

Abstract Even in a world with zero transaction costs, status seeking can prevent efficient Coasean bargaining. Using simple illustrations and various examples, we show that ignoring this impediment can explain the failure of some negotiations where an efficient bargain seems a priori reachable and expected. Rather than just emphasizing this neglected issue, we discuss various institutional and behavioral strategies by which this impediment can be overcome and even strategically used in socially desirable directions, such as bargaining over status.