Bargaining and the Timing of Investment
International Economic Review, 1997, vol. 38, issue 3, 527-46
The joint determination of the timing of investment and wage bargaining is modeled. Two cases are considered: (1) there is an alternating-offer bargaining game over binding wage contracts and production is possible only when agreement is reached and (2) there are no binding contracts so revenue is divided in period-by-period bargaining postinvestment. Investment can occur earlier in case (2) than in case (1) and the equilibrium in case (2) can Pareto-dominate the equilibrium with binding contracts. These conclusions depend on players' discount factors. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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