Collective Bargaining With Pre‐Donation May Lead to Tax Evasion in the Labor Market

ABSTRACT We consider a collective bargaining model in the presence of a government that can tax corporate income. Using this model, we investigate whether workers or the firm can manipulate 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 making pre‐donation is beneficial for workers but harmful to the firm. 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.