Exclusion From Employee Ownership: Evidence From Estonian Case Studies

One of the surprising developments in the privatization processes of post-socialist economies was the high incidence of employee ownership. However, the available evidence suggests that the number of employee-owned firms is declining quite rapidly. This paper approaches the decline by using data on individuals in Estonian employee-owned firms. The key idea is that employee ownership can be sustainable only if it is extended also to new, incoming employees.We analyze the determinants of ownership in employee-owned firms and find out that new employees are excluded from ownership. While this finding is consistent with the literature on “degeneration” of employee-owned firms, it is not consistent with earlier empirical research. We argue that in developed economies, there are many countervailing forces that prevent the decline, but these are not in operation in Estonia. The peculiarity of Estonian findings is explained by different motives of entry of employee ownership vs. advanced market economies. However, the findings from this study may carry over to other transition economies as well.