Sunk Capital, Unions and the Hold-Up Problem: Theory and Evidence from Sectoral Data

In this paper we test for the hold-up problem by considering the effect of unions’ bargaining power on the rate of growth of investment per worker and labour productivity across sectors characterised by different levels of sunk capital investments. We develop a search and matching model with hetereogeneous sectors and ex-post collective wage bargaining and test the predictions of the model using a difference-in-difference approach on manufacturing sector data in a set of OECD countries during the period 1980-2005. We do find that union power slows down investment and labour productivity particularly in high sunk capital industries. We refine our empirical analysis showing that the underlying hold-up problem is exacerbated when strikes are not regulated after a collective contract is signed and there is no arbitration, while the concentration of unions and the presence of social pacts sustain cooperative equilibria and alleviate such a problem. Our results are robust to a series of controls and possible endogeneity of union power.