Strategic Labour Contracts.

Labor contracts affect a firm's cost function and for this reason they can be used as a recommitment device to gain a strategic advantage against other firms. In a model that is otherwise neutral, it is found that if firms compete in prices, then strategic considerations alone yield results similar to those obtained by C. Azariadis (1983)--workers are underemployed and worse-off in more adverse states of nature. On the other hand, if firms compete in quantities, then the equilibrium contracts resemble those of J. Green and C. Kahn (1983)--workers are overemployed and better-off in more adverse states.