THE COST OF SOCIAL PACTS

ABSTRACT The paper deals with the various institutions capable of improving the macroeconomic performance in a situation of conflict between unions and the government. In particular, we discuss the difficulty of agreeing with a cooperative solution and the need for some kind of explicit or implicit compensation for unions in signing a social pact. A cooperative solution encapsulating the operation of the different mechanisms designed to cope with the conflict and including the various elements of compensation is presented. The model shows that the amount of the explicit compensation depends on the extent of the strategic conflict between the parties as well as on the factors that determine the implicit compensation (i.e., unions’ inflation aversion, partisanship) or are partial substitutes for it (i.e., the conservative central banker). Finally, the role played by external anticipated and unanticipated shocks is also discussed.