Union Utility Maximisation and Optimal Contracts
ByJane Black, George Bulkley
Pages 16

This paper analyses the type of contract which will be chosen by a union which attempts to maximise the sum of the utilities of its M members, subject to the constraint that the firm must earn a profit of at least an amount, π0. The determination of π0 is an important issue, a primary function of trade unions being to secure as much of the value added by the firm’s activities for their members as possible. However, the exact determination of π0, through relative bargaining strengths, threats of strikes or lock-outs, is not the focus of this paper, which is primarily concerned with the efficiency costs resulting from the existence of the union. These costs will be shown to depend crucially on the type of contract chosen, where π0 is treated as given, although it will also be shown that in some circumstances, depending on the type of contract, the absolute level of π0 may affect efficiency.