Exploitation of Collective Bargaining in the Labor Market

We consider a collective bargaining model for the determination of labor hours and wages in the presence of a government that can tax corporate income. The original form of this model was developed by Del Rey et al. (2022) in the absence of taxes. Using our modified model with taxes, we investigate whether workers or the firm can exploit the bargaining equilibrium, with the help of Sertel's (1992a) pre-donation idea, by committing to transfer a part of their would-be payoffs to the other party. We show that pre-donation by any party cannot affect the equilibrium hours or the social welfare while it may affect the welfare distribution in the economy if and only if the corporate tax rate is positive. In case this tax rate is positive, we find that making pre-donation to the firm is beneficial for workers. Moreover, the optimal pre-donation of workers enables them to fully extract the tax revenue that the government could obtain in the absence of pre-donation while keeping the welfare of the firm unchanged. On the other hand, making pre-donation to workers is harmful to the firm and beneficial for the government while having no effect on the welfare of workers.