ARTICLE IN PRESS JID: JEBO [m3Gsc;September 30, 2019;12:11] Journal of Economic Behavior and Organization xxx (xxxx) xxx Contents lists available at ScienceDirect Journal of Economic Behavior and Organization journal homepage: www.elsevier.com/locate/jebo Endogenous scope of firm-union bargaining with vertical pay comparisons Michael Kopel a,∗ , Emmanuel Petrakis b , Anna Ressi c a Department of Organization and Economics of Institutions, University of Graz b Department of Economics, University of Crete c Chair of Organization Theory, WHU - Otto Beisheim School of Management a r t i c l e i n f o Article history: Received 13 September 2018 Revised 27 July 2019 Accepted 16 September 2019 Available online xxx JEL classification: J50 J53 L13 Keywords: Scope of bargaining Unionized oligopoly Decentralized bargaining Relative fairness concerns Vertical pay comparison a b s t r a c t There is strong evidence that employees’ motivation and incentives in the workplace are affected by vertical pay comparisons. In a stylized Cournot duopoly model with firm– specific unions that institutionalize workers’ vertical fairness concerns, we show that uni- versal wage employment (w,e)–bargaining may arise as the equilibrium scope of bargain- ing institution. We thus propose that intra–firm vertical fairness concerns may resolve the mismatch between recent findings in the empirical literature on labor market institutions and the predictions of traditional models that universal (w,e)–bargaining will never arise in equilibrium (the “Scope of Bargaining Puzzle”). We derive a number of testable hypothe- ses that address the recent shift towards more decentralized bargaining institutions, the decline in unions’ bargaining power, and the prevalence of (w,e)–bargaining. © 2019 Elsevier B.V. All rights reserved. 1. Introduction In the industrial relations literature, a lot of attention has been paid to the scope of firm–union bargaining, i.e., to the question: “What do firms and unions bargain about?” Two models of bargaining agendas have dominated the theoretical literature. Under right–to–manage (RTM) bargaining, employment is determined unilaterally by the firm and only the wage is the outcome of negotiations between the firm and its union. In contrast, under wage–employment or (w,e)–bargaining, firms and unions bargain about both wages and employment (Agell and Lundborg, 1995). 1 In this paper, we consider the “Scope of Bargaining Puzzle” and offer a novel explanation based on the observation that unions care about vertical fair- ness, i.e. about the distribution of rents between workers and owners. The puzzle is that even though (w,e)–bargaining is widely observed for entire industries in reality, traditional firm-union bargaining models (e.g., Dowrick, 1990; Dobson, 1997; Petrakis and Vlassis, 2000) do not predict the endogenous emergence of universal (w,e)–bargaining as an equilibrium bargaining institution. (Bughin, 1999, p. 1030) notes: ∗ Corresponding author. E-mail addresses: michael.kopel@uni-graz.at (M. Kopel), petrakis@uoc.gr (E. Petrakis), anna.ressi@whu.edu (A. Ressi). 1 Wage–employment bargaining is often referred to as efficient bargaining (EB). https://doi.org/10.1016/j.jebo.2019.09.017 0167-2681/© 2019 Elsevier B.V. All rights reserved. Please cite this article as: M. Kopel, E. Petrakis and A. Ressi, Endogenous scope of firm-union bargaining with vertical pay comparisons, Journal of Economic Behavior and Organization, https://doi.org/10.1016/j.jebo.2019.09.017