Unions in a General Equilibrium Model of Firm Formation

Abstract

Unions are introduced into a general equilibrium model of firm formation. I find, under reasonable conditions, that large firms are more likely to be unionized, and that unionized firms are more productive and "better managed" than nonunion firms of the same size. As well, unions reduce economic efficiency by distorting the "occupation choice" decision between managing a firm and working in one. Perhaps surprisingly, this distortion persists even when individual union contracts set both wages and employment in a fully efficient manner but can disappear when the mechanism that allocates property rights to union jobs is changed in certain ways.

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