Entry Threats and Inefficiency in ‘Efficient Bargaining’

Whether the outcome of bargaining over wage and employment between an incumbent firm and a union remains efficient under entry threat is examined. The workers\' reservation wage is not known to the entrant, and entry is profitable only against the high reservation wage. The entrant observes the pre-entry price, but not necessarily the wage agreements. When wage is not observed, contracts feature over-employment. Under separating equilibrium the low type is over-employed, and under pooling equilibrium the high type is over-employed. But when wage is observed, pooling equilibrium may not always exist, and separating equilibrium does not involve any inefficiency. [Working Paper No. 2010-016].