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ESOP fables: the impact of employee stock ownership plans on labor disputes

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Author Info
Peter Cramton
Hamid Mehran
Joseph Tracy

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Abstract

By the early 1990s, employee stock ownership plans (ESOPs) had become as prevalent in unionized firms as in nonunionized firms. However, little research has been devoted to examining the implications of ESOPs for collective bargaining or, more generally, for cross ownership. In this paper, we extend the signaling model of Cramton and Tracy (1992) to allow partial ownership by the union. We demonstrate that ESOPs create incentives for unions to become weaker bargainers. As a result, the model predicts that ESOPs will lead to a reduction in strike incidence and in the fraction of labor disputes that involve a strike. We examine these predictions using U.S. bargaining data from 1970 to 1995. The data suggest that ESOPs do increase the efficiency of labor negotiations by shifting the composition of disputes away from costly strikes. Consistent with improved bargaining efficiency, we find that the announcement of a union ESOP leads to a 50 percent larger stock market reaction when compared with the announcement of a nonunion ESOP.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 347.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:347

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Keywords: Employee fringe benefits ; Stock options ; Collective bargaining;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Tracy, J. & Ohtake, F., 1992. "The Determinants of Labor Disputes in Japan : A Comparison with the US," Papers 282, Osaka - Institute of Social and Economic Research.
  2. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-81, November. [Downloadable!] (restricted)
  3. Abowd, John M, 1989. "The Effect of Wage Bargains on the Stock Market Value of the Firm," American Economic Review, American Economic Association, vol. 79(4), pages 774-800, September. [Downloadable!] (restricted)
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  5. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Blackwell Publishing, vol. 54(3), pages 345-64, July. [Downloadable!] (restricted)
  6. Douglas Kruse & Joseph Blasi, 1995. "Employee Ownership, Employee Attitudes, and Firm Performance," NBER Working Papers 5277, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Ben-Ner, Avner & Jun, Byoung, 1996. "Employee Buyout in a Bargaining Game with Asymmetric Information," American Economic Review, American Economic Association, vol. 86(3), pages 502-23, June. [Downloadable!] (restricted)
  8. Robert Flanagan, 1984. "Wage Concessions and Long-Term Union Wage Flexibility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1984-1), pages 183-222. [Downloadable!]
  9. Christofides, Louis N, 1990. "The Interaction between Indexation, Contract Duration and Non-contingent Wage Adjustment," Economica, London School of Economics and Political Science, vol. 57(227), pages 395-409, August. [Downloadable!] (restricted)
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  10. Chaplinsky, Susan & Niehaus, Greg, 1994. " The Role of ESOPs in Takeover Contests," Journal of Finance, American Finance Association, vol. 49(4), pages 1451-70, September. [Downloadable!] (restricted)
  11. Gordon, Lilli A. & Pound, John, 1990. "ESOPs and corporate control," Journal of Financial Economics, Elsevier, vol. 27(2), pages 525-555, October. [Downloadable!] (restricted)
  12. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March. [Downloadable!] (restricted)
  13. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March. [Downloadable!] (restricted)
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  14. Beatty, Anne, 1995. "The cash flow and informational effects of employee stock ownership plans," Journal of Financial Economics, Elsevier, vol. 38(2), pages 211-240, June. [Downloadable!] (restricted)
  15. Joseph S. Tracy, 1988. "Testing Strategic Bargaining Models Using Stock Market Data," NBER Working Papers 2754, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Myron S. Scholes & Mark A. Wolfson, 1989. "Employee Stock Ownership Plans and Corporate Restructuring: Myths and Realities," NBER Working Papers 3094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Cramton, Peter C & Tracy, Joseph S, 1992. "Strikes and Holdouts in Wage Bargaining: Theory and Data," American Economic Review, American Economic Association, vol. 82(1), pages 100-121, March. [Downloadable!] (restricted)
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  18. Motohiro Morishima, 1991. "Information sharing and collective bargaining in Japan: Effects on wage negotiation," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 44(3), pages 469-485, April.
  19. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December. [Downloadable!] (restricted)
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