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Labor Representation in Governance as an Insurance Mechanism

Author

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  • E Han Kim
  • Ernst Maug
  • Christoph Schneider

Abstract

We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Results based on German establishment-level data show that skilled employees of firms with 50% labor representation on boards are protected against layoffs during adverse industry shocks. They pay an insurance premium of 3.3% in the form of lower wages. Unskilled blue-collar workers are unprotected against shocks. Our evidence suggests that workers capture all the gains from improved risk sharing, whereas shareholders are no better or worse off than without codetermination.

Suggested Citation

  • E Han Kim & Ernst Maug & Christoph Schneider, 2018. "Labor Representation in Governance as an Insurance Mechanism," Review of Finance, European Finance Association, vol. 22(4), pages 1251-1289.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:4:p:1251-1289.
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    File URL: http://hdl.handle.net/10.1093/rof/rfy012
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    JEL classification:

    • J59 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Other
    • 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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