Wage-Rise Contract and Cournot Competition with Labor-Managed Firms

This paper examines the effectiveness of the wage-rise-contract policy as a strategic commitment in a two-stage quantity-settingmodel with two labor-managed income-per-worker-maximizing firms. The policy is a promise by the firm that it will announce acertain output level and a wage premium rate, and if it actually produces more than the announced output level, then it will pay each employee a wage premium uniformly. In the first stage, each firm independently decides whether or not to adopt the policy. In the second stage, each firm independently chooses its actual output. It is then shown that there exists an equilibrium in which at least one firm adopts the policy.