Technological Irreversibility in a Right-to-Manage Model

The paper focuses on the interactions between investment and non-cooperative wage bargaining when the investment decision of the firm bears irreversibly both on the size of the productive capacity and on the capital intensity of the technology used by the firm. The paper first shows how a given investment decision (i.e. the choice of a given capacity and a given technology) affects the wage bargaining solution. This solution changes of course quantitatively since the level of the bargained wage changes with the level of investment. It also changes qualitatively since the relation linking the bargained wage to a given investment decision also changes. The firm takes of course this into account when investing and identifies different (three) types of investment decisions inducing each a particular type of bargaining agreement. The paper then shows that qualitative changes may occur in the investment policy of the firm : the function describing the optimal investment decision may exhibit discontinuities with respect to the parameters describing the optimal investment decision may exhibit discontinuities with respect to the parameters describing the environment of the firm (like the bargaining power of the union, its fall back position,…). In particular, the installed capacity and the employment level are not necessarily monotonically decreasing functions of the bargaining power of the union.