Bargaining and the Timing of Investment

The joint determination of the timing of investment and wage bargaining is modelled. Two cases are considered: (a) There is an alternating-offer bargaining game over binding wage contracts and production is possible only when agreement is reached. (b) There are no binding contracts so revenue is divided in period-by- period bargaining post-investment. Investment can occur earlier in case (b) than in case (a) and the equilibrium in case (b) can Pareto dominate the equilibrium with binding contracts. These conclusions depend on players' discount factors.