Abstract:
We examine whether the outcome of bargaining over wage and employment between an incumbent firm
and a union remains efficient under entry threat. The workers\' reservation wage is not known to the
entrant, and entry is profitable only against the high reservation wage. The entrant observes the
pre-entry price, but not necessarily the wage agreements. When wage is not observed, contracts feature
over-employment. Under separating equilibrium the low type is over-employed, and under pooling
equilibrium the high type is over-employed. But when wage is observed, pooling equilibrium may not
always exist, and separating equilibrium does not involve any inefficiency.
