Institutions, Bargaining Power and Labor Shares

Abstract

We use a static framework characterized by both moral hazard andholdup problems. In the model the optimal allocation of bargainingpower balances these frictions. We examine the impact of improvedmonitoring on that optimal allocation and its impact upon effort, investment,profits and rents. The model’s predictions are consistentwith the recent evolution of labor shares, wages per efficiency unitsand the ratio of labor in efficiency units to capital in several OECDcountries. The model suggests further that improvement in monitoringmay also play a key role in understanding opposition to institutionalreforms in the labor market.