Faculty of Economics and Business Administration Publications Database

Holdup in oligopsonistic labour markets - a new role for the minimum wage

Madden, Paul
Volume: 15
Pages: 334 - 349
Month: June
ISSN-Print: 0927-5371
Link External Source: Online Version
Year: 2008
Keywords: Holdup; Investment; Minimum wage

We consider a labour market model of oligopsonistic wage competition and show that there is a holdup problem although workers do not have any bargaining power. When a firm invests more, it pays a higher wage in order to attract workers from competitors. Because workers participate in the returns on investment while only firms bear the costs, investment is inefficiently low. A binding minimum wage can achieve the first-best level of investment, both in the short run for a given number of firms and in the long run when the number of firms is endogenous.