Strategic trade policy and union-firm bargaining agenda

Abstract

In this paper, we revisit the issue of the scope of bargaining between duopolistic firms and unions in an open economy with strategic trade policy. It is shown that, in contrast with the case of the absence of export tax/subsidy, a right-to-manage (RTM) arrangement always emerges endogenously as a sub-game perfect Nash equilibrium in agreement between parties. Moreover, such an arrangement may be also Pareto-optimal in both exporting countries in the sense that profits, workers' welfare (provided that union's power is sufficiently high) and social welfare as a whole are higher than the efficient bargaining (EB) arrangement. Moreover, since the government of the country in which there is EB (while in the other country the alternative agenda RTM is used) levies a tax on export, then the conventional result that under quantity competition it is always optimal for exporting countries to subsidise exports may be reversed.

Keywords:

• Export subsidy
• efficient bargaining
• right-to-manage
• Cournot duopoly

JEL Classification:

• F16
• J51
• L13

Acknowledgments

We are extremely grateful to an anonymous referee for valuable comments that have substantially improved the quality of the paper. Usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See also for instance Fanti and Buccella (2015) for a presentation of the alternative timing assumptions in the game with mixed agendas.

2. Other contributions on the determination of the scope of bargaining are Petrakis and Vlassis (2000), Vannini and Bughin (2000) and Kraft (2006). However, the latter two articles abstract from the issue of the agreement between firms and unions on the scope of bargaining, while the first work assumes very specific rules such as the RTM is an equilibrium institution and employment may be included on agenda only if it is profitable for both the firm and the union, otherwise the agent which is hurt will veto it. Therefore, such works are not directly comparable with the present one.

3. As known, Eaton and Grossman (1986) showed that the same mechanism acts through a tax (instead of a subsidy) in the case of price (instead of quantity) competition.

4. Note that both works consider the case in which a union is present in only the ‘domestic’ market. Other articles deal with economies each with unionised labour markets but, for example, focusing on the issue of direct foreign intra-industry investment (Zhao 1995), or on the occurrence of reciprocal dumping despite the presence of trade costs (Naylor 1998), rather than on trade.

5. This is a specific case of the more general Stone–Geary utility function, i.e. Pencavel (1984, 1985): where w° is the reservation or competitive wage. A value of θ = 1 gives the rent-maximising case (i.e. the union seeks to maximise the total rent); values of θ smaller (higher) than 1 imply that the union is less (more) concerned about wages and more (less) concerned about jobs. Moreover, the unions aim to maximise the wage bill when θ = 1 and w° = 0.

6. The apex–e.g. RTM/RTM–denotes the choice of the type of bargaining arrangement by firms i and j, respectively.

7. The expression for SW (s_i, s_j) is too long and is omitted here for brevity.

8. Note also that in the absence of unions (i.e. b = 0) the timing of this game in the mixed case implies that the firm 1 would remain in any case leader in the product market, and thus the corresponding first move advantage cannot be further ameliorated by the subsidy, so that the better thing that the country 1's government can make would be to set a zero subsidy.

9. Note that also this export rivalry model is at all formally equivalent to a model of closed economy without government's intervention. Therefore, the result obtained in Fanti (2015) would equal those which would be obtained in the present model without the government's intervention.