Strategic innovation with complete and incomplete labour market contracts

In a model of strategic R&D competition between two firms that negotiate wi th independent unions we show that: (i) incomplete labour market contracts may Pareto-dominate complete labour market contracts; (ii) even when comple te contracts Pareto-dominate incomplete contracts, economies can get stuck in the incomplete contract equilibrium. These conclusions provide additiona l strategic reasons why complete labour market contracts may not be used-ev en if they were feasible. We propose two testable predictions to discrimina te between complete and incomplete contracts: (i) the variance of wages is lower with complete contracts; (ii) the variance of employment is higher un der complete contracts.