The trade-off between precommitment and flexibility in trade union wage setting

This paper examines two types of contract structures in a model where a trade union supplies labor to an industry, and sets the wage to maximize welfare. Firms' investment is endogenous, and the industry price is stochastic. Under short-term contracts, the union sets the wage after the firms' investment is in place, but also after the industry price is known. Under long- term contracts, the wage is chosen before investment and before the industry price is known. With short-term contracts the union has the benefit of ex-post wage flexibility, while under long-term contracts the union has the benefit of advance wage commitment which may be an important determinant of contract structure. The trade-off is examined in detail.

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