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Rhineland exit

  • Lans Bovenberg
  • Coen Teulings

We advance three reasons for preferring the Anglo-Saxon business model above the Rhineland model. First, serving multiple stakeholders leads to ill-defined property rights. Second, giving workers a claim on the surplus of the firm raises the cost of capital for investments in jobs. Third, assigning the full surplus of the firm to shareholders provides the best possible social insurance by the diversification of firm-specific risks on capital markets. Whereas globalisation has increased firm-specific risk by intensifying competition, globalisation of capital markets has also greatly increased the scope for diversification of firm-specific risk. This is an efficient form of social insurance. Coordination in wage bargaining and collective norms on what is proper compensation play an important role in reducing the claim of workers on the firm's surplus. In Denmark, workers bear les firm-specific risk than workers in the United States do. Collective action thus has an important role to play. Politicians, however, also face the temptation to please voters and incumbent workers with short-run gains at the expense of exposing workers to firm-specific risks and reducing job creation for future generations.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 101.

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Date of creation: Mar 2008
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Handle: RePEc:cpb:discus:101
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