The Introduction of Works Councils in German Establishments — Rent Seeking or Rent Protection?

Some recent empirical studies seem to suggest that German works councils engage in rent‐seeking activities rather than in the creation of joint establishment surplus. However, those cross‐sectional studies do not address the issue of causation. We address this issue by investigating the factors that influence the employees' decision to introduce a works council in their establishment. Councils are more likely to be adopted in establishments with a very poor sales situation and poor employment growth. They are also more likely to be adopted in establishments where management does not pursue an expansive market strategy. Altogether, our results support the hypothesis that employees introduce works councils to protect the quasi‐rents they have created by their efforts and human capital investments.