Local versus Central Wage Bargaining with Endogenous Investments

Investment behavior may depend on whether wage bargaining takes place centrally or locally (at the firm level). The outcome of the wage bargain will in turn depend on previous investments. Ignoring other differences between the two bargaining regimes, endogenous investments imply that wages are lower and profits higher under local wage bargaining than under central bargaining. This does not necessarily imply that employment is highest under local bargaining, since investments may differ in the two cases. With a Nash bargaining solution, however, reasonable assumptions imply that employment is highest under local wage bargaining.