Bilateral Delegation, Wage Bargaining and Managerial Incentives: Implications for Efficiency and Distribution

We develop a model of bilateral delegation in wage and employment bargaining to study efficiency and distributional implications in monopoly and in Cournot duopoly. In both markets delegation causes underproduction, but has contrasting implications for bargaining pie and for its distribution. In monopoly the bargaining pie contracts. In duopoly the bargaining pie expands, sometimes even up to the collusive level suggesting that delegation is conducive to implicit collusion. Surprisingly, a partyÂ’s payoff can be inversely related to its bargaining power. The well-known duopoly result of overproduction occurs only in unilateral delegations and when the delegating party is sufficiently strong.