Strategic Profit Sharing in a Unionized Oligopoly

This paper studies the incentives for firms and unions to establish profit sharing contracts as a strategic instrument in a Cournot product market oligopoly with decentralized and centralized wage bargaining. Therefore, we examine the stability of these institutional arrangements and show that unions and firms collectively prefer classical wage contracts. However, under decentralized wage bargaining individual firms and unions have incentives to replace classical wage contracts by profit sharing agreements. Under a centralized wage bargaining system semi-collusion - where firms collude over the form of the labor contract but set product market quantities in a competitive fashion-is externally and internally stable. It can be shown that firms do not have incentives to deviate to negotiate separate firm-level wages unless profit-sharing is feasible. Hence, the possibility to conclude profit-sharing agreements can destabilize the so-called semi-collusive agreement and lead to more decentralized wage negotiations