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Collective Choice and Control Rights in Firms

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Author Info

  • Gregory K. Dow

    (Simon Fraser University)

  • Gilbert L. Skillman

    (Wesleyan University)

Abstract

Recent writers have asserted that firms controlled by workers are rare because workers have diverse preferences over firm policies, and thus suffer from high transaction costs in making collective decisions. This is contrasted with firms controlled by investors, who all support the goal of wealth maximization. However, the source of the asymmetry between capital and labor has not been clearly identified. For example, firms could attract labor inputs by selling transferable shares, and well-known unanimity theorems from the finance literature carry over to models of this kind. We resolve this puzzle by arguing that because financial capital is exceptionally mobile, capital markets are sufficiently competitive to induce unanimity. The lower mobility of human capital implies that labor markets are monopolistically competitive and hence that unanimity cannot be expected in labor-managed firms. Moreover, such firms are vulnerable to takeover by investors while capital-managed firms are substantially less vulnerable to takeover by workers.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 0509003.

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Length: 25 pages
Date of creation: 09 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpmi:0509003

Note: Type of Document - pdf; pages: 25. 25 page pdf file including title page and 3 pages of references; no graphs or tables
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Web page: http://128.118.178.162

Related research

Keywords: capitalist firms; labor-managed firms; collective choice; preference heterogeneity; unanimity; voting; membership markets; control rights;

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References

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  1. Dreze, Jacques H & Hagen, Kare P, 1978. "Choice of Product Quality: Equilibrium and Efficiency," Econometrica, Econometric Society, vol. 46(3), pages 493-513, May.
  2. Kramer, Gerald H, 1973. "On a Class of Equilibrium Conditions for Majority Rule," Econometrica, Econometric Society, vol. 41(2), pages 285-97, March.
  3. Makowski, Louis, 1983. "Competitive Stock Markets," Review of Economic Studies, Wiley Blackwell, vol. 50(2), pages 305-30, April.
  4. Chris Doucouliagos, 1995. "Worker participation and productivity in labor-managed and participatory capitalist firms: A meta-analysis," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 49(1), pages 58-77, October.
  5. Sadanand, Asha B & Williamson, John M, 1991. "Equilibrium in a Stock Market Economy with Shareholder Voting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 1-35, February.
  6. Dow,Gregory K., 2003. "Governing the Firm," Cambridge Books, Cambridge University Press, number 9780521818537.
  7. Dow, Gregory K., 1986. "Control rights, competitive markets, and the labor management debate," Journal of Comparative Economics, Elsevier, vol. 10(1), pages 48-61, March.
  8. Hart, Oliver D, 1979. "On Shareholder Unanimity in Large Stock Market Economies," Econometrica, Econometric Society, vol. 47(5), pages 1057-83, September.
  9. Gregory Dow, 1996. "Replicating Walrasian equilibria using markets for membership in labor-managed firms," Review of Economic Design, Springer, vol. 2(1), pages 147-162, December.
  10. McKelvey, Richard D, 1979. "General Conditions for Global Intransitivities in Formal Voting Models," Econometrica, Econometric Society, vol. 47(5), pages 1085-1112, September.
  11. Michael Magill & Martine Quinzii, 2002. "Theory of Incomplete Markets, Volume 1," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262632543.
  12. Hart, Oliver D, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Wiley Blackwell, vol. 46(1), pages 1-30, January.
  13. Makowski, Louis & Pepall, Lynne, 1985. " Easy Proofs of Unanimity and Optimality without Spanning: A Pedagogical Note," Journal of Finance, American Finance Association, vol. 40(4), pages 1245-50, September.
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Cited by:
  1. David Kelsey & Frank Milne, 2010. "Takeovers and cooperatives: governance and stability in non-corporate firms," Journal of Economics, Springer, vol. 99(3), pages 193-209, April.
  2. Gregory K. Dow, 2000. "Allocating Control Over Firms: Stock Markets Versus Membership Markets," Discussion Papers dp00-03, Department of Economics, Simon Fraser University, revised Feb 2000.

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