Labour unionisation structure and innovation under convex costs

The theoretical literature shows that firms have higher incentive for innovation under decentralised labour unions compared to a centralised labour union charging discriminatory wages. However, empirical evidence may not always support this conclusion. The industrial relations literature also showed that unions have ambiguous effects on innovation. We show that a centralised union charging discriminatory wages to reflect local conditions may increase R&D investments compared to decentralised unions if the firms use decreasing returns to scale technologies. Hence, we contribute to the literature by showing that a centralised wage system reflecting local conditions at the firm-level creates higher or lower incentive for innovation compared to decentralised unions, depending on the technologies used by the firms. We also show that the consumers may be better off under a centralised union compared to decentralised unions. Given that many countries consider consumer surplus as a guiding principle for competition policies, our result shows that antitrust authorities may prefer a centralised union reflecting local conditions compared to decentralised unions.