Collective Bargaining With Pre-Donation May Lead To Tax Evasion in the Labor Market

Abstract

We consider a collective bargaining model in the presence of a government that can tax corporate income. Using this model, we investigate whether workers or the firm can manipulate the bargaining equilibrium, with the help of Sertel's (1992a) pre-donation idea, by committing to transfer a part of their would-be payoffs to the other party. We show that making pre-donation is beneficial for workers but harmful to the firm. Moreover, the optimal pre-donation of workers enables them to fully extract the tax revenue that the government could obtain in the absence of pre-donation while keeping the welfare of the firm unchanged.