Price Competition and the Effects of Labour Unions on Innovation

In contrast to the conventional belief that labour-union intervention reduces firms' incentives to innovate, I show that this may not hold true when the firms compete in prices. I find that the presence of labour unions may increase firms' incentives for innovation if the workers' reservation wage is high. Further, a comparison across the unionisation structures, viz., decentralised unions and centralised union, reveals that whether the firms innovate more under the former union structure or the latter one depends on the hold-up problem and the reservation wage of the workers.