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Risk and Lack of Diversification under Employee Ownership and Shared Capitalism

In: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options

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Author Info

  • Joseph R. Blasi
  • Douglas L. Kruse
  • Harry M. Markowitz

Abstract

Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences.

(This abstract was borrowed from another version of this item.)

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This chapter was published in:

  • Douglas L. Kruse & Richard B. Freeman & Joseph R. Blasi, 2010. "Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options," NBER Books, National Bureau of Economic Research, Inc, number krus08-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8088.

    Handle: RePEc:nbr:nberch:8088

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    1. Richard Freeman & Douglas Kruse & Joseph Blasi, 2008. "Worker Responses To Shirking Under Shared Capitalism," NBER Working Papers 14227, National Bureau of Economic Research, Inc.
    2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
    3. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1986. "Fairness and the Assumptions of Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S285-300, October.
    4. Akerlof, George A, 1979. "The Case against Conservative Macroeconomics: An Inaugural Lecture," Economica, London School of Economics and Political Science, vol. 46(183), pages 219-37, August.
    5. Yusif Simaan, 1993. "What is the Opportunity Cost of Mean-Variance Investment Strategies?," Management Science, INFORMS, vol. 39(5), pages 578-587, May.
    6. Pulley, Lawrence B., 1981. "A General Mean-Variance Approximation to Expected Utility for Short Holding Periods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 361-373, September.
    7. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
    8. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
    10. David Neumark & Peter Cappelli, 1999. "Do "High Performance" Work Practices Improve Establishment-Level Outcomes?," NBER Working Papers 7374, National Bureau of Economic Research, Inc.
    11. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
    12. Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
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    Cited by:
    1. Mare Sarr and Mintewab Bezabih, 2013. "Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia," Working Papers 322, Economic Research Southern Africa.
    2. Robert Buchele & Douglas Kruse & Loren Rodgers & Adria Scharf, 2009. "Show Me the Money: Does Shared Capitalism Share the Wealth?," NBER Working Papers 14830, National Bureau of Economic Research, Inc.
    3. Douglas L. Kruse & Joseph R. Blasi & Rhokeun Park, 2008. "Shared Capitalism in the U.S. Economy? Prevalence, Characteristics, and Employee Views of Financial Participation in Enterprises," NBER Working Papers 14225, National Bureau of Economic Research, Inc.
    4. Joseph R. Blasi & Richard B. Freeman & Chris Mackin & Douglas L. Kruse, 2008. "Creating a Bigger Pie? The Effects of Employee Ownership, Profit Sharing, and Stock Options on Workplace Performance," NBER Working Papers 14230, National Bureau of Economic Research, Inc.

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