Sunk capital, unions and the hold-up problem: Theory and evidence from cross-country sectoral data

In this paper we study the hold-up problem by considering the effect of union bargaining power on the level of investment per worker across sectors characterised by different levels of sunk capital investment. We develop a search and matching model with heterogeneous sectors and ex-post collective wage bargaining and test the predictions of the model using a difference-in-difference approach on manufacturing sector data in a set of OECD countries during the period 1980-2000. We find that union power reduces investment per worker particularly in sunk capital intensive industries. We refine our empirical analysis showing that the underlying hold-up problem is exacerbated when strikes are not regulated after a collective contract is signed and there is no arbitration, while the presence of social pacts may sustain cooperative equilibria that alleviate the hold-up problem. Our results are robust to a series of controls and possible endogeneity of union power.