DP2021 Hold-Up, Industrial Relations and Takeover Threats

Author(s): Gilles Chemla
Publication Date: November 1998
Keyword(s): Bargaining, ESOPs, Investment, Takeovers, wage flexibility
JEL(s): D23, G34
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2021

This paper analyses the impact of takeover threats on long-term industrial relations. It argues that takeover threats dramatically affect the way in which an increase in workers' bargaining power affects (under)investment. Without loss of generality, we focus on the particular example of the economic consequences of union power in wage negotiations. In the absence of takeovers, the higher workers' bargaining power, the higher their wage flexibility and effort and the firm's capacity to invest, but the lower the firm's incentive to invest. Under the threat of a takeover reducing their expected wages, the workers' effort and wage flexibility are restricted and decrease with the workers' initial bargaining power. Various takeover defence mechanisms are compared.