Wage bargaining and product innovation: The role of market expansion effect

Using the right-to-manage model of union-firm bargaining, we show that a higher union power increases product innovation if the bargaining is decentralised, the market expansion effect is weak, and the cost of innovation is relatively low. Otherwise, the relationship between union power and innovation is negative. Hence, we contribute to the literature in two ways. Unlike the extant theoretical literature, we consider the effects on product innovation, which is empirically relevant but has been ignored in the theoretical literature and explain a positive relationship between union power and innovation.