Unionization, Incomplete Contracting, and Capital Investment

Abstract

This article examines empirically the hypothesis that incomplete contracts and resulting opportunistic behavior over the return to sunk assets reduces investment. Union-firm contracts are incomplete because they (1) do not prevent all actions aimed at changing the existing contract; (2) cover a relatively short time period; and (3) do not extend to union members yet to be hired. The primary response of firms is to reduce investment in specific durable assets and also to reduce employment growth and increase debt. The authors find fairly strong evidence of these effects in a sample of large publicly traded firms using firm-specific measures of unionization. Copyright 1993 by University of Chicago Press.