The Temporal Dimension of Wage Contracts in Oligopoly with Spillovers

This paper examines how the duration of wage contracts influences innovation incentives, wages and employment. We find that wages are non-monotone in the duration of wage contracts. Furthermore, a positive and one-to-one relation between innovation and union utility exists and both attain their highest value under a long-term contract. Profits may vary depending on the extent of R&D spillovers and the associated raising rivals' cost incentive, although they are highest when union/firms engage in a long-term contractual relation. Testable predictions to discriminate between short-term and long-term contracts are also discussed.