Risk and Lack of Diversification under Employee Ownership and Shared Capitalism
AbstractSome 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14229.
Date of creation: Aug 2008
Date of revision:
Publication status: published as Risk and Lack of Diversification under Employee Ownership and Shared Capitalism , Joseph R. Blasi, Douglas L. Kruse, Harry M. Markowitz. in Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options , Kruse, Freeman, and Blasi. 2010
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Joseph R. Blasi & Douglas L. Kruse & Harry M. Markowitz, 2010. "Risk and Lack of Diversification under Employee Ownership and Shared Capitalism," NBER Chapters, in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 105-136 National Bureau of Economic Research, Inc.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-31 (All new papers)
- NEP-BEC-2008-08-31 (Business Economics)
- NEP-UPT-2008-08-31 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
- Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
- 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.
- 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.
- David Neumark & Peter Cappelli, 1999.
"Do "High Performance" Work Practices Improve Establishment-Level Outcomes?,"
NBER Working Papers
7374, National Bureau of Economic Research, Inc.
- Peter Cappelli & David Neumark, 2001. "Do "high-performance" work practices improve establishment-level outcomes?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 54(4), pages 737-775, July.
- Yusif Simaan, 1993. "What is the Opportunity Cost of Mean-Variance Investment Strategies?," Management Science, INFORMS, vol. 39(5), pages 578-587, May.
- Richard B. Freeman & Douglas L. Kruse & Joseph R. Blasi, 2010.
"Worker Responses to Shirking under Shared Capitalism,"
in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 77-103
National Bureau of Economic Research, Inc.
- Richard Freeman & Douglas Kruse & Joseph Blasi, 2008. "Worker Responses To Shirking Under Shared Capitalism," NBER Working Papers 14227, National Bureau of Economic Research, Inc.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- 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.
- 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.
- 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.
- 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.
- Mare Sarr and Mintewab Bezabih, 2013.
"Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia,"
322, Economic Research Southern Africa.
- Mintewab Bezabih & Mare Sarr, 2012. "Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 53(4), pages 483-505, December.
- 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.
- 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.
- repec:nbr:nberwo:14230 is not listed on IDEAS
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.