"ESOP Fables: The Impact of Employee Stock Ownership Plans on Labor Disputes," (with Hamid Mehran and Joseph Tracy)
Working Paper, University of Maryland, September 2005.
By the early 1990s employee stock ownership plans (ESOPs) had become more
prevalent in unionized firms than in nonunionized firms. However, little
research has been devoted to examining the implications of ESOPs for collective
bargaining. Ben-Ner and Jun (1996) model ESOPs as a buyout option for the union.
The ownership share of the typical union ESOP, though, is significantly below
50%. In this paper, we extend the signaling model of Cramton and Tracy (1992) to
allow partial ownership stakes by the union. We demonstrate that ESOPs create
incentives for unions to become weaker bargainers. As a result, the model
predicts that ESOPs will lead to a reduction in the fraction of labor disputes
that involve a strike. We examine these predictions using U.S. bargaining data
from 1970-1995. The data suggest that ESOPs do increase the efficiency of labor
negotiations by reducing dispute rates and shifting the composition of disputes
from more costly strikes. Consistent with improved bargaining efficiency, we
find that the announcement of a union ESOP leads to a 50% larger stock market
reaction as compared to the announcement of a nonunion ESOP.
"Unions, Bargaining and Strikes,"
(with Joseph S. Tracy) in
John T. Addison and Claus Schnabel, eds., International Handbook of Trade
Unions, Cheltenham, UK: Edward Elgar, Chapter 4, 86-117, 2003.
Labor disputes are an intriguing feature of the
landscape of industrialized economies. Economists have had a long-standing
interest in formulating a framework for understanding and analyzing labor
disputes. The development of noncooperative bargaining theory provided the tools
for a theory of collective bargaining and labor disputes. A general aim of this
theoretical development is to inform policy makers of the efficiency and equity
effects associated with different labor laws and institutions that govern and
shape the collective bargaining process. While this new literature is still
evolving, it can already offer many insights into the interplay between policy
and the bargaining process. In this chapter, we will provide a sketch of this
new collective bargaining theory and illustrate its ability to aid in policy
analysis. We will also relate the predictions of the model to existing empirical
findings in the literature.
"Bargaining with Incomplete Information," (with Lawrence
M. Ausubel and Raymond J.
Deneckere), Robert J. Aumann and Sergiu Hart, eds., Handbook of Game Theory, Vol.
3, Amsterdam: Elsevier Science B.V.,
Chapter 50, 1897-1945, 2002.
A central question in economics is understanding
the difficulties that parties have in reaching mutually beneficial agreements.
Informational differences provide an appealing explanation for bargaining
inefficiencies. This chapter provides an overview of the theoretical and
empirical literature on bargaining with incomplete information. The chapter
begins with an analysis of bargaining within a mechanism design framework. A
modern development is provided of the classic result that, given two parties
with independent private valuations, ex post efficiency is attainable if and
only if it is common knowledge that gains from trade exist. The classic problems
of efficient trade with one-sided incomplete information but interdependent
valuations, and of efficiently dissolving a partnership with two-sided
incomplete information, are also reviewed using mechanism design. The chapter
then proceeds to study bargaining where the parties sequentially exchange
offers. Under one-sided incomplete information, it considers sequential
bargaining between a seller with a known valuation and a buyer with a private
valuation. When there is a "gap" between the seller's valuation and
the support of buyer valuations, the seller-offer game has essentially a unique
sequential equilibrium. This equilibrium exhibits the following properties: it
is stationary, trade occurs in finite time, and the price is favorable to the
informed party (the Coase Conjecture). The alternating-offer game exhibits
similar properties, when a refinement of sequential equilibrium is applied.
However, in the case of "no gap" between the seller's valuation and
the support of buyer valuations, the bargaining does not conclude with
probability one after any finite number of periods, and it does not follow that
sequential equilibria need be stationary. If stationarity is nevertheless
assumed, then the results parallel those for the "gap" case. However,
if stationarity is not assumed, then instead a folk theorem obtains, so
substantial delay is possible and the uninformed party may receive substantial
surplus. The chapter also briefly sketches results for sequential bargaining
with two-sided incomplete information. Finally, it reviews the empirical
evidence on strategic bargaining with private information by focusing on one of
the most prominent examples of bargaining: union contract negotiations.
"The Effect of Collective Bargaining Legislation on Strikes and Wages,"
(with Morley Gunderson and Joseph
S. Tracy) Review of Economics and Statistics, 81:3, 475-487, 1999.
Using Canadian data on large, private-sector
contract negotiations from January 1967 to March 1993, we find that wages and
strikes are substantially influenced by labor policy. The data indicate that
conciliation policies have largely been ineffective in reducing strike costs. In
contrast, contract reopener provisions appear to make both unions and firms
better off by reducing negotiation costs without systematically affecting wage
settlements. Legislation banning the use of replacement workers appears to lead
to higher strike costs both by increasing the frequency and duration of strikes.
"Impacts of Strike Replacement Bans in Canada," (with Morley
Gunderson and Joseph S. Tracy),
Labor Law Journal, 50:3, 173-179, Fall 1999.
In the labor relations area no issue generates as
much controversy and division between labor and management as does the
legislative ban on replacement workers. In the United States, the issue of a ban
on permanent replacement workers has come before Congress four times since 1988,
although the only action taken has been an executive order in 1995, banning the
government from doing business with firms that use permanent replacements
(Cramton and Tracy 1998). In Canada, where labor matters are under provincial
jurisdiction, legislative bans on permanent replacement workers exist in most
jurisdictions (except New Brunswick, Nova Scotia and Prince Edward Island),
either directly or indirectly by mandating that striking workers have the right
to their job once the strike is over -- they cannot be permanently replaced by
replacement workers who may have been temporarily hired during the strike. The
more stringent ban on the use of temporary replacement workers also has been in
place in Quebec since 1978, in British Columbia since 1993, and in Ontario
between 1993 and 1995
"The Use of Strike Replacements in Union Contract Negotiations: the U.S.
Experience 1980–1989," (with Joseph
S. Tracy) Journal of Labor Economics, 16:4, 667-701,
1998.
It is argued in many circles that a structural
change occurred in U.S. collective bargaining in the 1980s. Strike incidence
declined, dispute incidence increased, and the composition of disputes shifted
away from strikes and toward holdouts. We investigate the extent to which the
hiring of replacement workers can account for these changes. For a sample of
over 300 major strikes since 1980, we estimate the likelihood of replacements
being hired. We find that the risk of replacement is lower for bargaining units
with more experienced workers, and declines during tight labor markets. The
composition of disputes shifts away from strikes as the predicted risk of
replacement increases. In addition, the overall level of disputes increases as a
result of the shift in the composition of disputes. Based on our estimates
reducing the predicted replacement risk faced by bargaining units to the
pre-1982 levels would have lead to a reduction in the dispute incidence by
around 5 percentage points, an increase in the fraction of disputes involving a
strike by around 4 percentage points, and an increase in the strike incidence by
around 0.8 percentage points.
"Efficient Relocation of Spectrum Incumbents," (with Evan
Kwerel and John Williams) Journal
of Law and Economics, 41, 647-675, October 1998.
Changes in technologies and in
consumer demands have made prior radio spectrum allocations far from efficient.
To address this problem the FCC has recently reallocated spectrum for more
flexible use in bands that are partially occupied by incumbent license holders.
Often, it is necessary for the new license holder to relocate incumbents to make
efficient use of the spectrum. Regulations structuring the negotiation between
incumbent and new entrant can promote efficiency. In particular, giving the new
entrant the right to move the incumbent with compensation can reduce negotiation
costs and promote efficiency when there is private information about spectrum
values but good public information about the cost of relocating the incumbent.
We examine the experience of broadband PCS entrants in relocating microwave
incumbents. We conclude with some remarks on how these ideas might be applied to
digital television spectrum.
"Deception and Mutual
Trust: A Reply to Strudler," (with J. Gregory Dees) Journal of Business Ethics,
5, 813–822, 1995. Reprinted in Carrie Menkel-Meadow and Michael Wheeler
(eds.), What's Fair, John Wiley & Sons, 2004.
Alan Strudler has written a stimulating and
provocative article about deception in negotiation. He presents his views, in
part, in contrast with our earlier work on the Mutual Trust Perspective. We
believe that Strudler is wrong in his account of the ethics of deception in
negotiation and in his quick dismissal of the Mutual Trust Perspective. Though
his mistakes may be informative, his views are potentially harmful to business
practice. In this paper, we present arguments against Strudler’s position and
attempt to salvage the Mutual-Trust Perspective from his attack. Strudler’s
work reaffirms the need for a more pragmatic approach to business ethics. We
close the paper with a renewed call for more constructive and practical
approaches to business ethics research.
"Wage
Bargaining with Time-Varying Threats," (with Joseph S. Tracy), Journal of Labor
Economics, 12, 594–617, 1994.
We study wage bargaining in which the union is
uncertain about the firm's willingness to pay and threat payoffs vary over time.
Strike payoffs change over time as replacement workers are hired, as strikers
find temporary jobs, and as inventories or strike funds run out. We find that
bargaining outcomes are substantially altered if threat payoffs vary. If dispute
costs increase in the long-run, then dispute durations are longer, settlement
rates are lower, and wages decline more slowly during the short-run (and may
even increase). The settlement wage is largely determined from the long-run
threat, rather than the short-run threat.
"The Determinants
of U.S. Labor Disputes," (with Joseph
S. Tracy), Journal of Labor Economics, 12, 180–209, 1994.
We present a bargaining model of
union contract negotiations, in which the union decides between two threats: the
union can strike or continue to work under the expired contract. The model makes
predictions about the level of dispute activity and the form the disputes take.
Strike incidence increases as the strike threat becomes more attractive, because
of low unemployment or a real wage drop during the prior contract. We test these
predictions by estimating logistic models of dispute incidence and dispute
composition for U.S. labor contract negotiations from 1970 to 1989. We find
empirical support for the model's key predictions, but these associations are
weaker after 1981.
"Promoting Honesty in Negotiation: An Exercise in Practical Ethics," (with J. Gregory Dees) Business
Ethics Quarterly, 3, 359-394, 1993. Reprinted in Patricia Werhane and Tom
Donalson, Ethical
Issues in Business: A Philosophical Approach, Prentice-Hall, 1996, and
Carrie Menkel-Meadow and Michael Wheeler (eds.), What's Fair, John Wiley
& Sons, 2004.
In a competitive and morally
imperfect world, business people are often faced with serious ethical
challenges. Harboring suspicions about the ethics of others, many feel justified
in engaging in less-than-ideal conduct to protect their own interests. The most
sophisticated moral arguments are unlikely to counteract this behavior. We
believe that this morally defensive behavior is responsible, in large part, for
much undesirable deception in negotiation. Drawing on recent work in the
literature of negotiations, we present some practical guidance on how
negotiators might build trust, establish common interests, and secure
credibility for their statements thereby promoting honesty We also point out the
types of social and institutional arrangements, many of which have become
commonplace, that work to promote credibility, trust, and honesty in business
dealings. Our approach is offered not only as a specific response to the problem
of deception in negotiation, but as one model of how research in business ethics
might offer constructive advice to practitioners.
"Strikes and Holdouts in Wage Bargaining: Theory and Data," (with Joseph
S. Tracy) American Economic Review, 82, 100–121, 1992. Reprinted
in Bengt Holmstrom, Paul Milgrom, and Alvin E. Roth (eds.), Game Theory
in the Tradition of Bob Wilson, Berkeley Electronic Press,
www.bepress.com/wilson, May 2002.
We develop a private-information
model of union contract negotiations in which disputes signal a firm’s
willingness to pay. Previous models have assumed that all labor disputes take
the form of a strike. Yet a prominent feature of U.S. collective bargaining is
the holdout: negotiations often continue without a strike after the contract has
expired. Production continues with workers paid according to the expired
contract. We analyze the union’s decision to strike or hold out and highlight
its importance to strike activity. Strikes are more likely to occur after a drop
in the real wage or a decline in unemployment.
"Strategic Delay in Bargaining with Two-Sided Uncertainty," Review of Economic
Studies, 59, 205–225, 1992.
The role of strategic delay is
analyzed in an infinite-horizon alternating-offer model of bargaining. A buyer
and seller are engaged in the trade of a single object. Both bargainers have
private information about their own preferences and are impatient in that
delaying agreement is costly. An equilibrium is constructed in which the
bargainers signal the strength of their bargaining positions by delaying prior
to making an offer. A bargainer expecting large gains from trade is more
impatient than one expecting small gains, and hence makes concessions earlier
on. Trade occurs whenever gains from trade exist, but due to the private
information, only after costly delay.
"Dynamic Bargaining with Transaction Costs," Management Science, 37,
1221–1233, 1991.
A buyer and seller alternate making
offers until an offer is accepted or someone terminates negotiations. The
seller's valuation is common knowledge, but the buyer's valuation is known only
by the buyer. Impatience to reach an agreement comes from two sources: the
traders discount future payoffs and there are transaction costs of bargaining.
Equilibrium behavior involves either immediate trade, delayed trade, or
immediate termination, depending on the size of the gains from trade and the
relative bargaining costs. This contrasts with the pure discounting model where
termination never occurs, and the pure transaction cost model where delayed
trade never occurs.
"Shrewd Bargaining on the Moral Frontier: Toward a Theory of Morality in
Practice,"
(with J. Gregory Dees) Business Ethics Quarterly, 1, 135-167, 1991.
From a traditional moral point of
view, business practitioners often seem overly concerned about the behavior of
their peers in deciding how they ought to act. We propose to account for this
concern by introducing a mutual trust perspective, where moral obligations are
grounded in a sense of trust that others will abide by the same rules. When
grounds for trust are absent, the obligation is weakened. We illustrate this
perspective by examining the widespread ambivalence with regard to deception
about one’s settlement preferences in negotiation. On an abstract level, such
deception generally seems undesirable, though in many individual cases it is
condoned, even admired as shrewd bargaining. Because of the difficulty in
verifying someone’s settlement preferences, it is hard to establish a basis
for trusting the revelations of the other party, especially in competitive
negotiations with relative strangers.
"Sequential Bargaining Mechanisms," in Game-Theoretic Models of Bargaining,
Alvin Roth (ed.), Cambridge University Press, Chapter 8, 149–179, 1985.
The introductory discussion
presented in this chapter considers the simplest type of sequential bargaining
games in which the players’ time preferences are described by known and fixed
discount rates. I begin by characterizing the class of perfect bargaining
mechanisms, which satisfy the desirable properties of incentive compatibility
(i.e., each player reports his type truthfully), individual rationality (i.e.,
every potential player wishes to play the game), and sequential rationality
(i.e., it is never common knowledge that the mechanism induced over time is
dominated by an alternative mechanism). It is shown that ex post efficiency is
unobtainable by any incentive-compatible and individually rational mechanism
when the bargainers are uncertain about whether or not they should trade
immediately. I conclude by finding those mechanisms that maximize the players’
ex ante utility, and show that such mechanisms violate sequential rationality.
Thus, the bargainers would be better off ex ante if they could commit to a
mechanism before they knew their private information. In terms of their ex ante
payoffs, if the seller’s delay costs are higher than those of the buyer, then
the bargainers are better off adopting a sequential bargaining game rather than
a static mechanism; however, when the buyer’s delay costs are higher, then a
static mechanism is optimal.
"Bargaining with Incomplete Information: An Infinite-Horizon Model with
Two-Sided Uncertainty," Review of Economic Studies, 51, 579–593,
1984.
The resolution of any bargaining
conflict depends crucially on the relative urgency of the agents to reach
agreement and the information each agent has about the others’ preferences.
This paper explores, within the context of an infinite-horizon bargaining model
with two-sided uncertainty, how timing and information affect the rational
behavior of agents when commitment is not possible. Since the bargainers are
uncertain about whether trade is desirable, they must communicate some of their
private information before an agreement can be reached. This need for learning,
due to incomplete information about preferences, results in bargaining
inefficiencies: trade often occurs after costly delay. Thus, the model provides
an explanation for the inefficient bargaining behavior that appears to occur
often in practice.