Wirtschaft und Gesellschaft 1 9. Jahrgang (1 993), Heft 4 quasi-rents. In local bargaining, the quasi-rents are those of the particu­ lar plant. At the industry or national level, the quasi-rents are the aver­ age taken over all plants that are covered by the wage agreement. All wage bargairring entails a sort of profit-sharing. The higher the firms' profits, the more the union is able to take out in wages. When prof­ its are low, unians must settle for lower wage growth or lower employ­ ment (or a combination of the two). At the local level, wage bargairring is a form of profit sharing between a firm and its work force. At higher levels, the profits that are shared are aggregated over an industry or an entire economy. Unless a firm is large relative to the bargairring unit, the wage contract will not be sensitive to its profits. Only at the local level, therefore, will the implicit profit-sharing affect the firms' and unions' decisions regarding variables outside the wage agreement. Three varia­ bles are particularly important: workers' effort on the job, employment and investment. 4 . 1 . The Choice of Effort Workers' effort on the job is both productive (for the firm) and costly (for workers). Same aspects of workers' effort can vary from worker to worker. Other aspects of effort, however, are decided collectively. This is particularly true of the introduction of new techniques of production that increase productivity but demand greater effort. Workers' effort can rarely be negotiated at the industry level and never at the national level. Work places are too heterogeneaus for effort to be settled in a centralized manner. Yet whether effort is determined through local bargairring or by unilateral action, the presence or absence of local bargairring may have an important effect. Suppose, first, that there is local wage bargaining. It is clear from equations [9] and [10] that whether the level of effort is set by the union, the firm, or negotiated jointly, the choice will be the level of effort that maximizes the quasi-rents to be shared R (e, L, K) - v (e) L, or that equa­ tes the marginal benefit, ()Rj"de, with the marginal cost, v ' (e) L. Because of profit-sharing, local bargairring leads to an efficient choice of effort, regardless of whether effort itself is included in the bargain. Consider the case with centralized wage bargaining. With centralized bargaining, the wage reflects the average productivity of the industry (or national economy) which is insignificantly affected by the productivity of any single plant. Now control over the determination of effort is of cri­ tical importance. Employers would ignore the cost of workers' effort and set it as high as possible. The local work force would ignore the produc­ tivity gains of effort and attempt to keep effort as low as possible. Even if effort is bargairred at the local level, there is no reason to believe that the efficient level of effort would be abtairred unless employers and em­ ployees can make trade-offs between effort and wage increases. 438