March 2006

IZA DP No. 2043: Holdup in Oligopsonistic Labour Markets: A New Role for the Minimum Wage

revised version published in: Labour Economics, 2008, 15 (3), 356-371

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.