On the incentives to increase input efficiency under monopoly trade unions

We examine the effects of and the incentives for increasing input efficiency within a spatially segregated Cournot duopoly with monopoly trade unions whose utility functions depend on bothwages and employment. We show that with neoclassical as well as Leontief technology, unions raise wages to appropriate fully the gains from labor-saving technological (or organisational) improvements, leaving the firm with no incentive to invest in increasing the efficiency of workers. However, capital-saving technological improvement may be profitable depending on the elasticity of substitution. Finally, we examine the implication of a fixed minimum wage (or competitive labor market) in one country. (C) 2006 Elsevier B.V. All rights reserved.