In this project, supported by the German Research Foundation, the relationship between wages and firms' ability to pay was examined. Particular attention was paid to the question whether the existence and the extent of rent-sharing depends on the wage bargaining structure. In Germany, firms may be covered either by industry-wide collective wage agreements, firm-specific collective agreements or by no collective agreement at all. The intra-national institutional variation in the German wage determination process was exploited to assess its impact on the extent of rent-sharing and its implications for employment. The empirical analysis was based on establishment-level panel data (IAB-Betriebspanel) as well as on linked employer-employee panel data (LIAB) in order to control for differences in worker characteristics. First, differences in observables and unobservables appear to explain the full firmlevel contract wage premium in western Germany and the full premium associated with industry-level contracts in eastern Germany. Second, there remains a small, but statistically significant wage premium of about 2 per cent for industry-level contracts in western Germany and a similar premium for firm-level contracts in eastern Germany. Finally, results from a trend-adjusted difference-in-difference approach indicate that the industry-level wage premium in western Germany might be downward biased and the firm-level premium in eastern Germany might still be upward biased, once systematic differences in pre-transition wage growth are accounted for. The result that selection into industry-level contracts appears to be somewhat more relevant in eastern Germany might be explained by the fact that the decision of joining or leaving an employers’ association here is to a considerably larger extent left to the firm’s discretion than in western Germany. In western Germany, membership in an employers’ association is likely to be more exogenous, since it presumably reflects to a larger extent the result of a historically grown industrial relations structure.