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Are labor-controlled firms more innovative? Evidence from a regression discontinuity design

Author

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  • Momtaz, Paul P.

Abstract

We examine how labor representation on corporate boards affects innovation. Exploiting German co-determination law, which requires one-third (one-half) labor-elected directors in firms above 500 (2000) employees, we implement a regression discontinuity design using administrative employer-inventor-patent data. Crossing either threshold raises innovative productivity, measured as the forward citation-weighted number of patents per firm, by about 20%–25%. This increase is driven by more patents, while forward citations do not rise and decline significantly at the parity cutoff, indicating a shift toward more incremental, less path-breaking inventions. Additional evidence shows that labor-controlled firms insure workers against adverse labor market shocks, lengthen inventors’ employment spells, and offer wage incentives that reward patent quantity rather than quality. Overall, labor representation expands the number of patented inventions but dilutes their average citation impact, reallocating innovative effort in labor-controlled firms from path-breaking to incremental projects.

Suggested Citation

  • Momtaz, Paul P., 2026. "Are labor-controlled firms more innovative? Evidence from a regression discontinuity design," Economics Letters, Elsevier, vol. 265(C).
    • Handle: RePEc:eee:ecolet:v:265:y:2026:i:c:s0165176526001874
    DOI: 10.1016/j.econlet.2026.112993
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    Keywords

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    JEL classification:

    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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