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Productivity Shocks in a Union‐Duopoly Model
Author(s) -
Brandão António,
Pinho Joana
Publication year - 2018
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12222
Subject(s) - productivity , economics , welfare , shock (circulatory) , economic surplus , duopoly , labour economics , profit (economics) , marginal product , wage , marginal cost , production (economics) , microeconomics , macroeconomics , market economy , medicine
We study the impacts of idiosyncratic productivity shocks when: firms have asymmetric productivities; firms and unions bargain over wages; and firms decide employment. The efficient firm pays a higher wage but has lower marginal production costs (due to its productivity advantage). Profits and worker surplus are higher at the efficient firm. A positive productivity shock affecting the efficient firm is always welfare improving; while if affecting the inefficient firm it may be welfare detrimental (if consumers' gain does not compensate the loss in worker surplus and industry profit). Consumer surplus increases more when the productivity shock affects the inefficient firm.