Unionization, information asymmetry and the de-location of firms

We analyze the effects of unionization on the decision of a firm to de-locate internationally. In a model in which home and foreign workers are perfect substitutes and firms have an informational advantage concerning their productivity, the union offers a menu of wage-employment contracts. Because firms' outside options (producing abroad) depend on productivity, the problem is characterized by countervailing incentives. With the foreign profit sufficiently increasing in productivity, the overstating incentive dominates in equilibrium. Contracts are then characterized by overemployment. The union also affects the extensive margin. High-productivity firms are excluded because this narrows the possibility to overstate productivity, which saves on information rent. Using a numerical simulation, we show that these effects are quantitatively sizable.