International Economic Review, 40, 209-230

This paper provides a theory of strikes as part of a constrained efficient enforcement mechanism for an implicit contractual agreement. A firm possessing contemporaneously private information about demand engages in an enduring relationship with its work force. If the information becomes perfectly observable subsequently, then, modulo discounting, the first–best is implementable, but strikes are always off the equilibrium path. If the observations of the workforce are imperfect strikes occur in equilibrium. The dynamic contracting problem is modeled as a repeated game with imperfect monitoring. The equilibrium exhibits production inefficiency and incomplete insurance to mitigate the efficiencies caused by strikes.