Knowledge that Transforms

Using union contract and industry wage survey data, this article examines the effect of discounting on cooperative bargaining behavior by unions and firms. Game theory predicts that higher discount rates raise the temptation to defect from cooperation. Measures of cooperative behavior included the presence of merit pay, incentive pay, wage-employment guarantees, or labor-management study committees. Discount rates were proxied by the relevant industry's failure rate. Failure rates generally had negative effects on cooperation. Industry Wage Survey results showed larger effects for union than non-union establishments, providing support for the union bargaining framework.