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Risk and Lack of Diversification under Employee Ownership and Shared Capitalism

In: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options

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  • Joseph R. Blasi
  • Douglas L. Kruse
  • Harry M. Markowitz

Abstract

Some analysts view risk as the Achilles Heel of employee ownership and to some extent variable pay plans such as profit sharing and gainsharing. Workers in such "shared capitalist" firms may invest too much of their wealth in the firm, contrary to the principle of diversification. This paper addresses whether the risk in shared capitalism makes it unwise for most workers or whether the risk can be managed to limit much of the loss of utility from holding the extra risk. We create an index of financial security based on worker pay and wealth, and find that workers who feel financially insecure exhibit fewer of the positive outcomes associated with shared capitalism, and are less interested than other workers in receiving more employee ownership or even more profit sharing in their workplaces. This response is substantially lessened, however, when accounting for worker empowerment, good employee relations, and high-performance work bundles that appear to buffer worker response toward risk and increase interest in shared capitalism plans. We also discuss portfolio theory which suggests that any risky investment -- including stock in one's company -- can be part of an efficient portfolio as long as the overall portfolio is properly diversified. We show that given estimates of risk aversion parameters, workers could prudently hold reasonable proportions of their assets in employee stock ownership of their firm with only a modest loss in utility due to risk. A good strategy for firms is to personalize individual portfolios on the basis of worker characteristics and preferences, developing investment strategies that would diversify each worker's entire portfolio in ways consistent with individual risk preferences.
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Suggested Citation

  • Joseph R. Blasi & Douglas L. Kruse & Harry M. Markowitz, 2010. "Risk and Lack of Diversification under Employee Ownership and Shared Capitalism," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 105-136 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:8088
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    References listed on IDEAS

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    1. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1986. "Fairness and the Assumptions of Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages 285-300, October.
    2. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
    3. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151-151.
    4. Richard B. Freeman & Douglas L. Kruse & Joseph R. Blasi, 2010. "Worker Responses to Shirking under Shared Capitalism," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 77-103 National Bureau of Economic Research, Inc.
    5. Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
    6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-741, September.
    7. Yusif Simaan, 1993. "What is the Opportunity Cost of Mean-Variance Investment Strategies?," Management Science, INFORMS, vol. 39(5), pages 578-587, May.
    8. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    9. Akerlof, George A, 1979. "The Case against Conservative Macroeconomics: An Inaugural Lecture," Economica, London School of Economics and Political Science, vol. 46(183), pages 219-237, August.
    10. Pulley, Lawrence B., 1981. "A General Mean-Variance Approximation to Expected Utility for Short Holding Periods," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(03), pages 361-373, September.
    11. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    12. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
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    Citations

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    Cited by:

    1. Douglas L. Kruse & Joseph R. Blasi & Rhokeun Park, 2010. "Shared Capitalism in the U.S. Economy: Prevalence, Characteristics, and Employee Views of Financial Participation in Enterprises," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 41-75 National Bureau of Economic Research, Inc.
    2. Mintewab Bezabih & Mare Sarr, 2012. "Risk Preferences and Environmental Uncertainty: Implications for Crop Diversification Decisions in Ethiopia," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 53(4), pages 483-505, December.
    3. Geert Braam & Erik Poutsma, 2015. "Broad-Based Financial Participation Plans and Their Impact on Financial Performance: Evidence from a Dutch Longitudinal Panel," De Economist, Springer, vol. 163(2), pages 177-202, June.
    4. Robert Buchele & Douglas L. Kruse & Loren Rodgers & Adria Scharf, 2010. "Show Me the Money: Does Shared Capitalism Share the Wealth?," NBER Chapters,in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 351-375 National Bureau of Economic Research, Inc.
    5. Nicolas Aubert & Bernard Grand & André Lapied & Patrick Rousseau, 2009. "Is employee ownership so senseless," Finance, Presses universitaires de Grenoble, vol. 30(2), pages 5-29.
    6. Nicolas Aubert & Xavier Hollandts, 2015. "How Shared Capitalism Affects Employee Withdrawal: An Econometric Case Study Of A French-Listed Company," Post-Print halshs-01256759, HAL.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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