Union Wage Bargaining and the Incentive to Innovate

Abstract

We analyse the impact of union wage bargaining on the firm’s incentive to invest into research. In a heterogenous Cournot duopoly, each firm invests resources into a patent race similar to Reinganum (1983) and bargains the wage with a labour union. Union wage bargaining affects the incentive to innovate through its effect on the profit situation of the firm. Besides the hold-up and the strategic effect which have been analysed in the literature, we are able to identify a third effect of union wage bargaining: its impact on the Arrow effect. This effect is positive for the research incentive. Solving the model numerically reveals that in sum, union wage bargaining decreases the incentive for doing research. This result is independent of the bargaining institution (right-to-manage or efficient bargaining) or the degree of product heterogeneity.