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Experimental Effects of Institutionalizing Co-determination by a Procedurally Fair Bidding Rule

Author

Listed:
  • Federica Alberti

    (University of Portsmouth)

  • Werner Güth

    (Max Planck Institute for Research on Collective Goods)

  • Kei Tsutsui

    (University of Portsmouth
    University of Bath)

Abstract

From an institutional perspective we contribute to corporate governance of firms by (1) proposing a procedurally fair mechanism that is ethically desirable, and (2) experimentally testing whether procedural fairness crowds-in ethical behavior of managers (on behalf of shareholders) and workers. The experiment sees one ‘manager’ and three ‘workers’ (possibly representing three sections of the firm) co-determining an efficiency-enhancing investment which could harm some workers. Firstly, the manager claims a share of the investment surplus, then workers ‘bid’ for the investment to express their willingness to satisfy the manager’s claim in case the investment is implemented. If the sum of workers’ bids is less than the manager’s claim, the investment is not implementable, which means its surplus will be lost. Workers’ behavior is ‘ethical’ when they veto unfair managerial claims, because the workers have to sacrifice own earnings. Hence, a manager’s fair claim is the ethical response to the threat of workers’ veto. If the manager claims fairly, workers’ ethical behavior is to ‘truthfully’ bid their investment evaluations; by all doing so, they equally share whatever surplus the manager has left for them. The experimental results show ethical behavior of managers in the form of fair claims. Despite these fair claims, workers behave less ethically by strategically underbidding. So the procedurally fair mechanism only partially crowds-in ethical behavior. This study should interest theorists of stakeholder management, especially those engaged in designing the rules of corporate governance.

Suggested Citation

  • Federica Alberti & Werner Güth & Kei Tsutsui, 2023. "Experimental Effects of Institutionalizing Co-determination by a Procedurally Fair Bidding Rule," Journal of Business Ethics, Springer, vol. 184(2), pages 445-458, May.
  • Handle: RePEc:kap:jbuset:v:184:y:2023:i:2:d:10.1007_s10551-022-05124-y
    DOI: 10.1007/s10551-022-05124-y
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    References listed on IDEAS

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    More about this item

    Keywords

    Ethical institutions; Ethical behavior; Fair surplus sharing; Co-determination; Procedural fairness; Laboratory experiments;
    All these keywords.

    JEL classification:

    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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