A Simple Model of Holdup, Union Voice, and Firm Investments

In this chapter, we propose a theoretical assessment of the relationship between unions and investments. We develop a simple model where a firm chooses its investment level anticipating the employee's effort choice and the outcome of wage bargaining. First, and consistently with the holdup view, we find that the union's bargaining power has a negative effect on the accumulation of fixed capital. Second, we show that this negative effect is mitigated by the voice ability of unions to ease the displeasure of exerting effort. Hence, when the voice ability of unions is strong vis-à-vis their bargaining power, the holdup view does not necessarily survive, and unionized firms invest more than their nonunionized competitors.