The Strategic Use of Inventories in an Infinite Horizon Model of Wage and Employment Bargaining

Inventories strengthen a firm's bargaining position in wage and employment negotiations. The model isolates this strategic motive for holding inventories. In a steady state, employment and output are lower, but not necessarily wages. Welfare effects are ambiguous: compared to a set-up where inventory accumulation is not possible, steady state union utility is lower, but if the firm starts from a zero level of inventories, then the union may be better off. Steady state profits may be higher or lower, and the firm may be better off or worse off if it starts from zero inventories.