1 9. Jahrgang (1 993), Heft 4 Wirtschaft und Gesellschaft The importance of effort for workers' welfare and firm's productivity is an important explanation of the ubiquity of local bargaining, even in highly centralized bargaining systems. In Norway and Sweden, centrali­ zed wage agreements at the national level are followed by subsequent supplementary bargaining at the industry and local level. In Germany, the introduction of new technology must be negotiated with local works councils. Local bargaining performs the critical function of creating a community of interest between employers and workers in the introduc­ tion of new technology. 4 . 2. Employment and Investment Local bargaining as a form of rent-sharing also affects decisions re­ garding employment and investment. According to the model of wage demands that we used in sections 2 and 3 , firms choose the level of em­ ployment along the demand for labor curve where profits are maximized for a given wage. This is appropriate for bargaining at the industry or national level where the firm is small compared to the bargaining unit. In that case, each firm considers the wage to be exogenaus and optimal­ ly adjusts employment. But if the firm is large in relation to the bargain­ ing unit, as is the case with decentralized bargaining, then firms might not ignore the way that current employment influences future wage bar­ gains. With local bargaining, employers can lower the wage by raising em­ ployment and thereby reducing output per worker (RIL) . According to equation [9] , if the relationship between employment and wage level is taken into account in maximizing profits, employers would choose the level of employment given by the condition (JRj(JL = v. Observe that the marginal costs of labor to the firm with local bargaining, v, is less than the union wage, w, and may well be less than the competitive wage. This implies that local bargaining can lead to a full employment, suction equilibrium where the employers' desire to expand is constrained by the supply of labor similar to the equilibrium of Weitzman's share economy. Local unians may have sufficient power to block expansions of employ­ ment that reduce their wages, but at least employers would desire to hire more workers with local wage bargaining than with centralized bargai­ ning. One might question whether a choice of labor off the demand for labor curve is an equilibrium. Since w > v, firms could increase profits in the short run by laying off workers and returning to their demand for labor curve as soon as the wage contract is signed and wages are fixed. Yet, there will be new negotiations in one or two years . If the firm cannot suddenly expand its work force just before the next round of bargaining begins, the wage in the future will be influenced by the level of employ­ ment chosen in thE; present. 439