STRATEGIC LABOR CONTRACTS

Labour contracts affect a firm's cost function, and for this reason th ey can be used as a precommitment device to gain a strategic advantage against other firms. In a model that is otherwise neutral, it is foun d that if firms compete in prices, then strategic considerations alone yield results similar to those obtained by Azariadis (1983) - workers are underemployed and worse off in more adverse states of nature. On the other hand, if firms compete in quantities, then the equilibrium c ontracts resemble those of Green and Kahn (1983) - workers are overemp loyed and better off in more adverse states.