Labor-Management Bargaining: Contract Curves and Slutsky Equations

Abstract

Consider a firm in which labor and management bargain over division of the firm's organizational rent and negotiate the firm's policy. I emphasize the relationship between the bargainer's contract curve and the firm's Slutsky equations. I can describe a bargaining firm as a hybrid of a neoclassical profit-maximizing firm and a pure labor-managed firm. I apply the methodology to models of employment contracts and identify three separate circumstances in which labor's bargaining power affects the firm's comparative static behavior. First, there is inefficiency in contractual bargaining. Second, income effects in the worker's utility function interact with the firm's capital-cost burden. Third, labor's interest in long-term utility maximization need not coincide with management's interest in profit maximization. This last case arises from the incompleteness of the market for property rights in the firm.

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