Document Type

Working Paper

Publication Date


Working Paper Number

WP #15003, February 2015


We study how optimally to insure customers of a unionized firm, such as an auto maker, against the loss of network benefits that occurs when other consumers abandon the firm. The union first announces a wage. A random demand shock is then realized. The firm then chooses its price and, finally, consumers decide whether or not to buy from the firm. Common knowledge of payoffs is perturbed slightly in order to obtain a unique outcome. In this outcome the union chooses an excessive wage, leading consumers to abandon the firm too often. The first best can be costlessly attained by providing consumers with countercyclical insurance.

Publication Status

Under review.

JEL Classification

C72, D42, D62, H21

File Format



59 pages

File Function

Supercedes "Optimal Insurance for Small Stakeholders" (ISU Economics Department working paper number 14012, April 2014).

Included in

Economics Commons