BARGAINING WHILE SEARCHING FOR OUTSIDE OPTIONS - A POTENTIAL ROLE FORUNIONS

This paper develops a simple model of negotiation between an employer and his employees. The employee can allocate effort either inside the firm in order to increase the total surplus to be bargained over or ou tside the firm searching for evidence about good outside options in or der to increase his bargaining power vis-g-vis the employer, We show t hat there are two types of equilibria, one in which the employee searc hes out, the total surplus being small, and the other in which the emp loyee makes an effort inside the firm thereby increasing the total sur plus. Moreover, due to the non-observability of the form of the effort , we show that these two types of equilibria may coexist, suggesting a new role for unions in the coordination onto the Pareto-superior equi librium where the employee makes the effort inside the firm. We also s tudy the effect of base wage. (C) 1998 Elsevier Science B.V. All right s reserved.